Zebra Technologies Corporation
2007 Annual Report
Identify. Track. Manage.
Zebra Technologies improves its customers’ business performance with products and
solutions that identify, track and manage assets, transactions and people. We are a leading
global provider of specialty digital printing and automatic identification solutions. Business,
government, and other organizations use our on-demand thermal printers and supplies, radio
frequency identification (RFID) solutions, real-time locating systems (RTLS) and mission-critical
Zebra Technologies improves its
supply chain execution solutions to deliver better customer service, increase productivity, and
customer service, increase pro-
strengthen security. Our commitment to industry leadership, financial strength, and growth
customers’ business performance
ductivity, and strengthen secu-
with products and solutions that
rity. Our commitment to industry
helps Zebra build long-term value for its customers, partners and stockholders.
identify, track and manage
leadership, financial strength,
assets, transactions and people.
and growth helps Zebra build
We are a leading global provider
long-term value for its custom-
of specialty digital printing and
ers, partners and stockholders.
automatic identification solu-
Zebra posted its fourth consecu-
tions. Business, government, and
tive year of record sales in 2006.
other organizations use our on-
Net sales were $759.5 million, up
demand thermal printers and
8.2%. Earnings of $1.00 per diluted
supplies, radio frequency identifi-
share, compared with $1.47 for
cation (RFID) solutions, real time
2005, did not reflect the underlying
locating systems (RTLS) and mis-
strength at the core of our business.
sion-critical supply chain execu-
Two one-time events reduced
tion solutions to deliver better
profitability. We settled a litigation
F I n a n C I a L S u m m a R y
2007 % change
2006 % change
2005
(Inthousands,exceptper-sharedataandpercentages)
Operating Results
Net sales
Gross profit
Operating income
Net income
Diluted earnings per share
$ 868,279
14.3%
$ 759,524
417,118
143,185
110,113
1.60
16.4
78.0
55.2
60.0
358,420
80,429
70,946
1.00
8.2%
1.4
(44.9)
(33.2)
(32.0)
$ 702,271
353,420
146,028
106,184
1.47
Capitalization
Cash & cash equivalents
and investments and
marketable securities
(current and long-term)
Working capital
Total assets
Stockholders’ equity
$ 281,179
298,660
1,034,278
902,693
$ 559,189
404,836
963,142
877,681
$ 544,239
680,554
918,415
857,972
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Our financial achievements reflect
Zebra Enterprise
Zebra’s industry leadership – the
Solutions Group
strength of the company brand,
Three strategic acquisitions –
the depth of its product portfolio,
WhereNet, proveo and Navis –
the reach of its global channel
dramatically expanded the scope
network and proven customer
of our business in 2007. Separately,
demand for products and solutions
each company is a pioneer in its
that improve business performance
respective industry, with deep
and deliver a rapid return on
domain expertise, executive-level
investment. This year’s growth
customer relationships and
can be tied to advancements in
proven leadership in emerging
several areas, including:
technologies. Together, they now
•
More robust business pipelines
in targeted vertical markets, such
as mobile work force, retail and
public safety
comprise Zebra’s Enterprise
Solutions Group and enable Zebra
to deliver more mission-critical,
high-value applications to customers
in attractive vertical markets.
•
Expanded activity with key
customers, including the introduc-
WhereNet adds real-time locating
tion of new applications with
systems (RTLS) to Zebra’s capabilities.
established accounts
Increased volume of bookings
with new customers
Stronger relationships with valued
channel partners
GPS-based solutions from proveo
support the management of trucks
and other support vehicles at
airports. Navis’ enterprise solutions
optimize the flow and visibility of
cargo through marine terminals
and other inter-modal facilities
Deeper penetration into global
worldwide. Their unique end-to-
regions and emerging markets
end solutions complement Zebra’s
•
•
•
barcoding and RFID capabilities.
They strengthen the scope of data
Anders Gustafsson Chief Executive Officer
Record financial results underscore a year of
significant progress at Zebra. For 2007, earnings
grew 60 percent to $1.60 per share. net sales
increased 14.3 percent to $868.3 million. During
the year, we deployed more than $400 million in
acquisitions and share buybacks to accelerate
growth and boost capital returns.
2
Letter to stockhoLders
acquisition technologies and asset
Priorities for 2008
Integration of our recent acquisi-
global reach of our channel
management solutions that Zebra
We begin 2008 with strategic
tions into our Enterprise Solutions
network. These observations give
can offer. Today, the value Zebra is
priorities directed at unlocking
Group will help us achieve our
me confidence in our ability to
able to deliver to its customers is
more company value. Continued
growth and profit goals. Simulta-
execute on our priorities and
unmatched by any competitor.
global expansion (with emphasis
neously, we continue to identify
achieve our goals.
on the developing market econo-
ways to take advantage of our
Industry Trends
mies of Brazil, Russia, India and
expanded product portfolio across
Thank you for your investment in
Zebra is uniquely positioned to
China) is central to our business
our global customer base.
Zebra. We appreciate your interest
benefit from several industry
plan. We are also penetrating
and look forward to sharing news
trends that are driving adoption of
deeper into high-growth vertical
Finally, our financial strength
of growth and success as we
specialty printing and automatic
markets, developing our global
and substantial cash generation
progress through 2008 and beyond.
identification solutions. These
channel network and improving
capabilities give us flexibility to
trends include increasingly
customer intimacy.
enhance growth and stockholder
complex supply chains, lean
returns. We will continue to pursue
manufacturing practices that
Zebra’s success is deeply rooted
additional strategic acquisitions to
are placing greater emphasis on
in the quality and reliability of
strengthen our industry leadership.
efficiency and cost reduction, and
its products and solutions. An
At the same time, we will explore
anders Gustafsson
concerns over safety and security
improved new product develop-
other means to improve returns
Chief Executive Officer
that call for better product
ment process will speed time-
on invested capital.
authentication and traceability.
to-market and our flexibility in
No other company can provide
meeting customer needs. Our new
The start of 2008 marks the
customers with such a broad
global supply chain strategy is
beginning of my first calendar
range of innovative solutions that
designed to lower product costs,
year as Zebra’s chief executive
help identify, track and manage
improve customer responsiveness
officer. I have experienced first-hand
assets, transactions and people
and tighten inventory manage-
the deep expertise and commitment
throughout the supply chain and
ment. Reducing expense growth
of our associates, attributes that
across the enterprise.
and increasing profitability are
are matched by the strength of
priorities as well, and we are
our product portfolio and the
aggressively exploring opportunities
throughout the organization to
eliminate duplicate costs.
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A Vertical Market Focus
Our increasing activity in delivering solutions to
targeted industries, or vertical markets, is a central
element to our global growth strategy.
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Government
and Public Safety
Governments around the world take
advantage of the broad range of Zebra
solutions to improve security, personnel
administration and military logistics.
Driver’s licenses, voting cards and
national IDs incorporate high-quality
photos, biometrics and other technologies
to ensure proper personal identification.
Bar codes printed on high-performance
genuine Zebra supplies and RFID-encoded
smart labels help government agencies
track inventories better and conduct
audits faster. Law enforcement officers
use mobile Zebra printers for ticketing
and in-field evidence tracking. Automated
gate access at terminals and ports,
enabled by Zebra’s yard management
systems, strengthen Homeland Security.
Manufacturing
The demands of increasing global
competition, surging new market
economies and the ongoing drive toward
just-in-time manufacturing continue
to create global opportunities for the
adoption of automatic identification
solutions. Zebra’s broad range of
technologies and solutions can be
deployed across the enterprise to
improve business processes and
deliver measurable cost savings
Optimize production flows with bar
code and RFID smart label solutions for
materials management, work-in-process
tracking, quality control, and product
identification. Ensure product safety
through the use of auto ID technologies
for product authentication and chain
of custody. Extend reach and control
by deploying real-time locating systems
to identify, track and manage valued
assets over a wide area.
5
Health Care Zebra remains at the forefront in deliver-ing technology that improves patient care by eliminating errors. Zebra wrist-bands, with accurate, legible, and tam-per-proof patient information, are a cornerstone of multiple bar code applica-tions that help health care professionals save lives by identifying the right patient every time. With a focus on acute care, sub-acute care, long-term health provid-ers and pharmacies, Zebra solutions are reliable tools that help improve medica-tion administration, manage medical records, and track medications, samples, supplies and equipment. Identify staff with employee ID cards to ensure greater security. Track and manage facility assets such as infusion pumps and other porta-ble equipment better with real-time locating systems enabled with active RFID technology from Zebra. Mobile Workforce
Organizations are making strategic
investments in mobile technology to
improve the efficiency and effective
ness of their employees in the field.
Rugged and reliable Zebra mobile printers
and accessories are essential components
of automated direct store delivery
applications. These applications help
ensure invoice accuracy; prevent costly
delivery, inventory, and ordering errors;
provide proof of delivery; and support
electronic settlement. Zebra mobile printing
solutions also help organizations improve
control over field service operations. Using
mobile computers and printers to issue
receipts and invoices at the time of delivery
accelerates the billing cycle and eliminates
the need for manual data entry and billing.
Proof of service receipts and on-the-spot
accurate invoicing improve customer
satisfaction.
6
Retail Retailers rely on the broad range of Zebra thermal printers and complementary supplies for dozens of applications that help them manage their inventory more efficiently, provide better in-store customer service and make their staffs more productive. From product pricing and shelf labeling to customized gift cards and self-service kiosks, Zebra solutions deliver quality, reliability and a measurable return on investment. RFID and wireless networking technology links the sales floor to the back room in real time to improve stock availability. Transportation and LogisticsZebra solutions protect integrity across the global supply chain, from the largest containers to the smallest packages. As the number of shipments and third-party logistics providers increase, our systems provide the visibility and operational control to increase shipment velocity. Our terminal operating systems and yard management solutions help optimize the flow of the world’s cargo, from the manufacturer to the retailer. The tighter tracking of goods, greater importance of reverse logistics and just-in-time delivery support the further adoption of barcoding, RFID and other automatic identification technologies to improve product safety and quality. 7
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Comparison of Five-Year Cumulative Total Return of Zebra Technologies Corporation,
the Hemscott Industry Group 815 Index and the NASDAQ Composite Market Index
Zebra Technologies Corporation
Hemscott Industry Group 815 Index
NASDAQ Composite Market Index
Stock Performance Graph
The graph depicted below compares the cumulative annual change since
December 31, 2002, of the total stockholder return on Zebra Technologies
Corporation Class A Common Stock with the cumulative total return on the
following published indices: (i) the Hemscott Industry Group 815 (Computer
Peripherals) Index1 and (ii) the NASDAQ Composite Market Index, during the
same period. This comparison assumes that $100 was invested in each of
the Company’s Class A Common Stock, the stocks comprising the Hemscott
Industry Group 815 Index, and the stocks comprising the NASDAQ Composite
Market Index, on December 31, 2002, and assumes that all dividends were
reinvested at the end of the month in which they were paid.
2002
2003
2004
2005
2006
2007
Zebra Technologies
Corporation
Hemscott Industry
Group 815 Index
NASDAQ Composite
Market Index
$ 100.00
$173.66
$220.77
$168.09
$136.47
$136.12
100.00
171.95
175.81
151.94
166.14
173.23
100.00
150.36
163.00
166.58
183.68
201.91
1. Hemscott, Inc. (formerly CoreData LLC and Media General Financial Services) publishes the Hemscott Industry
Group 815 (Computer Peripherals) Index. The index is comprised of the following companies: Acorn Factor Inc.,
Aruba Networks Inc., Astro-Med Inc., AU Optronics Corp. ADS, Avocent Corp., Electronics For Imaging, Emulex
Corp., Evans & Sutherland Computer Corp., Focus Enhancements Inc., Foundry Networks Inc., Hauppage Digital
Inc., iCAD Inc., Immersion Corp., InFocus Corp., Intermec Inc., Interphase Corp., Key Tronic Corp., Lantronix Inc.,
Lexmark International Inc., Logitech International SA ADR, Media Sciences International Inc., Mercury Computer
Systems Inc., Mobility Electronics Inc., MPC Computers Corp., MTS Medication Technologies Inc., Nice Systems Ltd.
ADR, O2Micro International Ltd., Opnet Technologies Inc., Planar Systems Inc., Printronix Inc., Radcom Ltd., RadiSys
Corp., Rimage Corp., SCM Microsystems Inc., Secure Computing Corp., Stratasys Inc., Top Image Systems Ltd.,
Transact Technologies Inc., Universal Display Corp., Video Display Corp., Wave Systems Corp. Cl. A, and
Zebra Technologies Corporation.
$250$200$150$100$50$012/31/200212/31/200312/31/200412/31/200512/31/200612/31/2007
Zebra Technologies Corporation 2007 Annual Report
unITED STaTES
SECuRITIES
anD EXCHanGE
COmmISSIOn
Washington, D. C. 20549
FORm 10-K
FOR annuaL anD TRanSITIOn
REPORTS PuRSuanT TO SECTIOnS
13 OR 15(d) OF THE SECuRITIES
EXCHanGE aCT OF 1934
X
annuaL REPORT PuRSuanT TO
SECTIOn 13 OR 15(d) OF THE
SECuRITIES EXCHanGE aCT OF 1934
For the fiscal year ended
December 31, 2007
OR
TRanSITIOn REPORT PuRSuanT
TO SECTIOn 13 OR 15(d) OF THE
SECuRITIES EXCHanGE aCT OF 1934
For the transition period
from to
Commission File number 000-19406
Zebra Technologies Corporation
(Exact name of registrant
as specified in its charter)
Delaware
(State or other
jurisdiction of
incorporation
or organization)
36-2675536
(I.R.S. Employer
Identification No.)
333 Corporate Woods
Parkway, Vernon Hills, IL 60061
(Address of principal (Zip Code)
executive offices)
Registrant’s telephone number, including
area code: (847) 634-6700
Securities registered pursuant to Section
12(b) of the Act:
Name of Exchange
Title of Each Class
on which Registered
Class A Common Stock, The NASDAQ Stock
par value $.01 per share Market, LLC
Securities registered pursuant to Section 12(g)
of the Act: None
Indicate by check mark if the registrant is a well-
known seasoned issuer (as defined in Rule 405 of
the Securities Act). Yes __X No __
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or
Section 15(d) of the Securities Act. Yes __ No __X
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such
shorter period that the registrant was required to
file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X No __
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained,
to the best of the registrant’s knowledge, in
definitive proxy or information statements
incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer or a
non-accelerated filer. See definition of “accelerated
filer and large accelerated filer ” in Rule 12b-2
of the Securities Act (Check one):
Large accelerated filer __X Accelerated filer __
Non-accelerated filer __
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of
the Securities Act).
Yes __ No __X
As of June 30, 2007, the aggregate market value of
each of the registrant’s Class A Common held by
non-affiliates was approximately $2,678,766,000.
The closing price of the Class A Common Stock on
June 30, 2007, as reported on the NASDAQ Stock
Market, was 38.74 per share.
As of February 22, 2008, 66,393,048 shares of
Class A Common Stock, par value $.01 per share,
were outstanding.
Documents Incorporated by Reference
Certain sections of the registrant’s Notice of
Annual Meeting of Stockholders and Proxy
Statement for its Annual Meeting of Stockholders
to be held on May 22, 2008, are incorporated by
reference into Part III of this report.
ZEBRa TECHnOLOGIES CORPORaTIOn anD SuBSIDIaRIES
PaRT I
InDEX
PaGE
References in this document to “Zebra,” “we,” “us,” or “our” refer to Zebra Technologies
Corporation and its subsidiaries, unless the context specifically states otherwise.
PaRT I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1A. Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . 10
PaRT II
Item 5.
Market for Registrant’s Common Stock, Related Stockholder Matters
and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 6. Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 7.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . 20
Item 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 9.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
PaRT III
Item 10. Directors, Executive Officers, and Corporate Governance . . . . . . . . . . . . . . . . . 23
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 12.
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 14. Principal Accounting Fees and Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
PaRT IV
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SIGnaTuRES
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
COnSOLIDaTED FInanCIaL STaTEmEnTS anD SCHEDuLE
Index to Consolidated Financial Statements and Schedule . . . . . . . . . . . . . . . . . . . . . . . . F-1
Safe Harbor
Forward-looking statements contained in this filing are subject to the safe harbor created
by the Private Securities Litigation Reform Act of 1995 and are highly dependent upon
a variety of important factors which could cause actual results to differ materially from
those reflected in such forward looking statements. These factors include:
• Market acceptance of Zebra’s printer and software products and competitors’
product offerings and the potential effects of technological changes,
• The effect of market conditions in North America and other geographic regions,
• Our ability to control manufacturing and operating costs, including the success of
migrating final printer product assembly offshore to a third-party manufacturer,
• Success of integrating acquisitions,
• Interest rate and financial market conditions because of our large investment portfolio,
• Foreign exchange rates due to the large percentage of our international sales and
operations, and
• The outcome of litigation in which Zebra is involved, particularly litigation or claims
related to infringement of third-party intellectual property rights.
When used in this document and documents referenced, the words “anticipate,”
“believe,” “estimate,” “will” and “expect” and similar expressions as they relate to
Zebra or its management are intended to identify such forward-looking statements.
We encourage readers of this report to review Item 1A, “Risk Factors,” in this report for
further discussion of issues that could affect Zebra’s future results. Zebra undertakes
no obligation to publicly update or revise any forward-looking statements, whether as
a result of new information, future events, changed circumstances or any other reason
after the date of this annual report.
Item 1. Business
Zebra Technologies Corporation was incorporated as an Illinois Corporation in 1969. We
became a Delaware corporation in 1991 in connection with our initial public offering,
which we completed in August 1991. We remain organized under the laws of the State of
Delaware, and our principal offices are located at 333 Corporate Woods Parkway, Vernon
Hills, Illinois 60061. Our main telephone number is (847) 634-6700 and our primary
Internet Web site address is www.zebra.com. You can find all of Zebra’s filings with the
SEC free of charge through the investor page on this Web site, immediately upon filing.
The Company
Zebra delivers products and solutions that improve our customers’ ability to identify,
track and manage assets, transactions and people. We design, manufacture and
distribute specialty printing devices that print variable information on demand at
the point of issuance. These devices are used worldwide by manufacturers, service
organizations and governments for automatic identification, data collection and personal
identification in applications that improve productivity, deliver better customer service
and provide more effective security. Our product range consists of direct thermal and
thermal transfer label and receipt printers, passive radio frequency identification (RFID)
printer/encoders, dye sublimation card printers and digital photo printers. We also sell
a comprehensive range of specialty supplies consisting of self-adhesive labels, thermal
transfer ribbons, thermal printheads, batteries and other accessories, including software
for label design and printer network management.
In 2007, we acquired WhereNet Corp., proveo AG and Navis Holdings, LLC. The
acquisitions of these companies expanded the range of identification and tracking
solutions we deliver to our customers. In addition, they provided us with new
technologies to offer our customers including active RFID and global positioning systems
(GPS). The products of these companies consist of battery-powered wireless tags,
fixed-position antennae, transponder modules and various application software. These
companies also sell consulting services, maintenance contracts and software licenses.
These companies are discussed separately at the end of this Item 1, “Business.”
Specialty Printer Products
We design our printer products to operate at the point of issuance to produce and dispense
high-quality labels, plastic cards, and photographs on demand. The exceptional diversity
of applications using our printer products for bar coding and personal identification
is comprised of routing and tracking, transactions processing, and identification and
authentication. These applications require high levels of data accuracy and where speed
and reliability are critical. They also include specialty printing for receipts and tickets
where improved customer service and productivity gains may be the primary reason for
printing, rather than a barcoding application. Plastic cards are used for secure, reliable
personal identification or access control. Digital photo printers are sold on an OEM basis to
professional photographers and for use in kiosks at retail and other locations.
Applications for our printing technology span most industries and geographies. They
include inventory control, small package delivery, baggage handling, automated
warehousing, JIT (Just-In-Time) manufacturing, employee time and attendance records,
file management systems, hospital information systems, medical specimen labeling,
shop floor control, in-store product labeling, employee ID cards, driver’s licenses, and
access control systems. As of December 31, 2007, management estimates that Zebra has
sold over 6,000,000 printers to users in approximately 100 countries.
We believe competitive forces on businesses worldwide to strengthen security, reduce
costs, improve quality, deliver better customer service, and increase productivity, support
the adoption of the printing and automatic identification applications Zebra provides,
because these solutions deliver significant and predictable economic benefits. Industry-
mandated compliance requirements for bar code labeling and RFID tagging are also
important catalysts in the deployment of these systems. We also believe that companies
are adopting automatic identification systems that incorporate barcoding and RFID for
business improvement applications. Many of these applications make increasing use
of enterprise-wide resource planning (ERP) and other process improvement systems in
manufacturing and service organizations. Greater emphasis on supply chain management,
the drive to reduce errors in healthcare, and heightened concern over safety and security
will lead to increased use of automatic identification systems. Still other applications are
taking advantage of recent advances in wireless and hand-held computing technologies.
Concern for safety and security and personal identification contribute to demand for
our card printer products. This concern has heightened interest in systems that provide
personal identification and access control, including secure ID systems for driver’s
licenses, employee and visitor badges, national identification cards, event passes, club
membership cards and keyless entry systems.
Our printers are used to produce bar code labels, passive RFID “smart” labels, receipts,
wristbands and tags, plastic cards, and photographs. We also sell related specialty labeling
materials, thermal ink ribbons, and bar code label design and network management
software. These products are used to provide bar code labeling, personal identification,
and specialty printing solutions principally in the manufacturing supply chain, retail,
healthcare and government sectors of the economy. We work closely with distributors,
resellers, kiosk manufacturers and end users of our products to design and implement
printing solutions that meet their technical demands. To achieve this flexibility, we provide
our customers with a broad selection of printer models, each of which can be configured
for a specific application. Additionally, we will select and, if necessary, create appropriate
labeling stock, ink ribbons and adhesives to suit a particular application. In-house
engineering personnel in software, mechanical, electronic and chemical engineering
participate in the creation and development of printing solutions for particular applications.
We produce the industry’s broadest range of rugged, on-demand thermal transfer and
direct thermal printers. Our printing systems include hundreds of optional configurations
that can be selected to meet particular customer needs. We believe this breadth of
product is a unique and significant competitive strength, because it allows Zebra to
satisfy the widest variety of thermal printing applications.
Of the major printing technologies, which include ink jet, laser and impact dot matrix,
management believes that direct thermal and thermal transfer technologies are best
suited for most bar code labeling applications. Thermal transfer printing produces dark,
solid blacks and sharply defined lines that are important for printing readily scannable bar
codes. These images can be printed on a wide variety of labeling materials, which enable
users to affix bar code labels to virtually any object. This capability is very important in the
industrial and service sectors Zebra serves. Direct thermal printing is best suited where
ease of use, smaller size and cost are important factors in the application. Accordingly, this
technology is found principally in Zebra’s mobile and desktop units.
As of December 31, 2007, we offered 56 thermal printer models with numerous variations,
in nine categories as follows:
• Performance tabletop printers for applications requiring continuous operation in
high output, mission-critical and industrial settings.
• RFID printer/encoders for passive high frequency (HF) and ultra-high frequency
(UHF) radio frequency identification (RFID) in the retail supply chain, for defense
logistics, and other applications. These units are used to print and encode “smart
labels” in a single pass. Smart labels are printable labels embedded with an ultra-
thin radio frequency transponder. Information encoded in these transponders can
then be read and modified by a radio frequency reader.
• Mid-range tabletop printers, which are designed for demanding commercial
applications.
• Desktop printers to deliver value and performance in applications with lower volume
or space restrictions.
• Mobile printers to meet the printing needs of workers in the field.
• Print engines, which are sold to manufacturers and integrators of high-speed
automatic label applicator systems and are available with or without RFID smart
label capabilities.
• Kiosk and ticket printers for use in kiosks and other unattended printing applications.
• Card printers, which print national identity cards, driver’s licenses, employee
identification badges, gift cards and personalized cards.
• Photo printers to produce digital photographs, either as part of a photo kiosk or
standalone in professional photography applications.
maintenance service, either directly as ZASPs or through independent service agents.
Zebra also provides technical support from in-house support personnel located in the
United States, the United Kingdom and Singapore. For most Zebra products, Zebra
provides interactive technical support via the Internet at www.zebra.com, 24 hours per
day, seven days per week.
In addition to their use in on-demand automatic identification applications, our thermal
printers can also be used for on-site batch production of custom bar code labels and
other graphics. This capability results in shorter lead times, reduced inventory, and more
flexibility than can be provided with traditional off-site printing.
Printer Supplies
Supplies products consist of stock and customized thermal labels, wristbands, smart
labels and tags, plastic cards, card laminates and thermal transfer ribbons. Zebra
promotes the use of genuine Zebra brand supplies with its equipment.
Zebra fully supports its printers, resellers and end users with an extensive line of superior
quality, high-performance supplies optimized to a particular user’s needs. Supplies are
chosen in consultation with the reseller and end user based on the specific application,
printer and environment in which the labeling system must perform. These printing
solutions frequently include proprietary ribbon and label formulations that are designed
to optimize image resolution and printer performance while meeting the most demanding
end user application performance criteria. Factors such as adhesion, resistance to
scratches, smudges and abrasion, and chemical and environmental exposures are all
taken into account when selecting the type of ribbon and labeling materials. The use of
supplies that are not carefully matched to specific printers can degrade image quality,
and decrease the part life of key printer components such as printheads.
Printer Related Software
Zebra has specialized printer management, label design and driver solutions to help unlock
the full potential of Zebra printers. The ZebraLink Solutions suite of networking, software,
firmware offerings, combined with the enhanced printer management capabilities of
ZebraNet™ Bridge, makes Zebra’s printers easy to use and integrate into small, medium
and enterprise-wide environments. Our goal is to provide software that enables high levels
of functionality to all major computer network and software systems. Network systems
include Ethernet, 802.11b/g and Bluetooth™ wireless systems. In 2007, Zebra added
support for enhanced 802.11b/g wireless securities, including WPA and WPA2.
Zebra offers label design and integration software specifically designed to optimize
the performance of Zebra bar code label printers. In addition to Zebra’s existing label
design and printer configuration tools, ZebraDesigner™, ZebraDesigner™ Pro and
ZebraDesigner™ for XML, we added ZebraDesigner™ Label Design Software for use with
mySAP™ Business Suite in 2007, making it possible to design labels and print to Zebra
printers from SAP™ without the need for middleware or additional programming.
Printer Maintenance and Services
Zebra provides depot maintenance and repair services at repair centers in Vernon
Hills, Illinois; Camarillo, California; Canada; Preston, U.K.; China; and the Netherlands.
Zebra Authorized Service Providers (ZASP) also provide repair services for most Zebra
products at their locations. In addition, Zebra offers on-site repair services for tabletop
printers in the United States. Outside of the United States, Zebra’s resellers may provide
Printer Warranties
In general, Zebra provides warranty coverage of one year on printers against defects in
material and workmanship. Printheads are warranted for nine months, and batteries are
warranted for three months. Zebra supplies are warranted against defects in material and
workmanship for their stated shelf life or twelve months, whichever ends first. Defective
equipment and supplies may be returned for repair, replacement or refund during the
applicable warranty periods.
Zebra’s Printer Technology
Our customers rely on Zebra to provide products and systems to identify, authenticate,
track or route both items and people, and then process the related transactions. These
products and systems use technologies that provide specific benefits in each application.
All Zebra printers and print engines use thermal printing, either direct thermal printing,
thermal transfer printing or dye-sublimation printing. This technology creates an image
by heating certain pixels of an electrical printhead to selectively image a ribbon or heat-
sensitive substrate.
Direct thermal printers apply the heat directly to a thermally-sensitive label, wristband, or
receipt to create an image. This benefits applications needing simple, reliable operation
such as shelf labeling, patient identification, and kiosk receipts. Some desktop label
printers, mobile printers and kiosk printers support only direct thermal printing.
Thermal transfer printers apply heat to a ribbon to release ink onto labels or tags. This
allows a wider range of specialty label materials and associated inks to be used for
applications like circuit board labels, chemical identification and product labels requiring
resistance to chemicals, temperature extremes, abrasion, or long life. Performance, mid-
range, print-engines and some desktop printers use thermal transfer printing but can also
support direct thermal printing.
Dye-sublimation printers apply heat to a ribbon to release a dye into a plastic card or
treated paper. This creates full color, photographic quality images well-suited to driver
licenses, access and identification cards, transaction cards, and on-demand photographs.
Our card printers and digital photo printers use dye-sublimation printing.
Direct thermal and thermal transfer printers create crisp images at high speed, making
them ideal for printing easily readable text and machine readable bar codes. Dye
sublimation thermal printers quickly create full-color images with visual characteristics
more similar to halide-based film than to pixel-based ink jet or laser printers, making
them ideal for high quality photographs and personalized plastic cards. Some printers
also include HF (13.56 MHz) or UHF (860-960 MHz) RFID technology that can encode
data into passive RFID transponders embedded in a label, card, or wristband. These
“smart labels” are finding growing acceptance in commercial and military supply chain
management, as well as many closed-loop tracking applications.
Zebra’s printers integrate company-designed mechanisms, electrical systems, and
firmware. Enclosures of metal or high-impact plastic ensure durability. Special mechanisms
optimize handling of labels, ribbons, and plastic cards. Fast, high-current electrical systems
provide consistent image quality. Mobile printers use NiMH or LiIon batteries to optimize
print quality over an extended operating shift. Firmware supports serial, parallel, Ethernet,
USB, infrared, Bluetooth, or 802.11b/g wireless communications with appropriate security
protocols. Printing instructions can be received as a proprietary language such as Zebra
Programming Language II (ZPL II), as a print driver-provided image, or as user-defined
XML. This makes the printers easy to integrate into virtually all common computer systems
including those operating on UNIX, Linux, MS/DOS, or Microsoft® Windows® operating
systems. Some independent software vendors, including Adobe, Oracle and SAP, have
included Zebra printing support in applications for healthcare, warehouse management,
manufacturing, passenger transportation, and retailing.
Printer Sales and Marketing
Sales. We sell our printer products primarily through distributors, value-added resellers
(VARs), and original equipment manufacturers (OEMs). We also sell our printer products
directly to a select number of named accounts. For media and consumables, we also sell
directly to end users through the Internet and telesales operations. Distributors and VARs
purchase, stock and sell a variety of automatic identification components from different
manufacturers and customize systems for end-user applications using their systems
and application integration expertise. Because these sales channels provide specific
software, configuration, installation, integration and support services required by end
users within various market segments, these relationships allow Zebra to reach end users
throughout the world in a wide variety of industries. Zebra experiences a minor amount
of seasonality in sales, depending on the geographic region and/or vertical market.
We functionally classify our direct VARs as Premier Partners, Advanced Partners, or
Associate Partners, depending on their business competencies, depth and breadth
of their sales teams, customer support capabilities, contributions to Zebra’s strategic
goals and sales commitment to Zebra. In addition, we offer VARs the opportunity to
earn certifications for mobile/wireless printers, supplies, services and RFID products
in vertical markets. We also sell through distributors, which in turn sell to an extended
VAR community. All VARs, as well as OEMs and systems integrators, provide customers
with a variety of automatic identification components including scanners, accessories,
applications software and systems integration expertise, and, in the case of some OEMs,
resell the Zebra-manufactured products under their own brands as part of their own
product offering. We believe that the breadth of this indirect channel network, both in
terms of variety and geographic scope, enhances our ability to compete.
In some instances, we have designated a customer as a Strategic Account when
purchases of Zebra products reach specified levels and support requirements for the
account become highly customized. Zebra sales personnel, either alone or together
with our partners, manage these Strategic Accounts to ensure their needs, including
consistent support for projects and applications, are being met.
The sales function also encompasses a group that manages a small number of Global
Alliances. They direct the business development strategies for a limited number of third-
party relationships that are strategic to new demand creation for specific vertical markets
and/or specific applications.
Marketing. Marketing operations encompass marketing communications, product
marketing, vertical marketing, solutions marketing, market research and channel
marketing functions. The product marketing group identifies, evaluates and recommends
new product opportunities and manages product introductions, positioning and demand
creation. Product marketing also focuses on strategic planning and market definition and
analyzes Zebra’s competitive strengths and weaknesses.
Printer Production and Manufacturing
We design our products to optimize product performance, quality, reliability, durability
and versatility. These designs combine cost-efficient materials, sourcing and assembly
methods with high standards of workmanship. In February 2008, we announced that
printer manufacturing will be transferred to a third-party manufacturer. This transition
is expected to occur over the next 18 to 24 months. See Note 21 to our Consolidated
Financial Statements included in this Annual Report on Form 10-K for further discussion
of the transfer and transition process. Prior to the recently announced transfer to a third-
party manufacturer, we assembled our products in-house largely on a configure-to-order
basis using components that have been sourced from around the world. We have the
in-house capability to produce mechanical assemblies and design many of our own tools,
fixtures and test equipment. Often, our manufacturing and test engineers coordinate
the development of new products with our new product engineers and vendors.
This collaboration increases manufacturing efficiency by specifying and designing
manufacturing processes and facilities simultaneously with product design.
We buy prefabricated component parts and subassemblies for use in the manufacture of
our products. Critical subassemblies include printheads, printed circuit board assemblies,
power supplies, integrated circuits, and stepper motors, which are obtained from
domestic and foreign suppliers at competitive prices. Purchase contracts provide for
price increases only in the event of certain increases in the costs of raw materials. Zebra
typically experiences significant variance in demand and, thus, carries inventory and
partners with key suppliers to deal with the variation.
Printer Competition
Many companies are engaged in the design, manufacture and marketing of bar code label
printers, card personalization solutions and dye sublimation photo printers. We consider
our direct competition in bar code label and receipt printing to be producers of on-
demand thermal transfer and direct thermal label printing systems and supplies. We also
compete, however, with companies engaged in the design, manufacture and marketing of
printing systems that use alternative technologies, such as impact dot matrix, ink-jet and
laser printing. Similarly, we consider manufacturers of card personalization systems that
are based on a broad range of alternative technologies as competition.
Dye sublimation, the technology incorporated in our card printer, is only one of several
commercially available types of equipment used to personalize cards. We also compete
with companies that produce identification cards using alternative technologies,
which include ink-jet, thermal transfer, embossing, film-based systems, encoders,
laser engraving and large-scale dye sublimation printers. These card personalization
technologies offer viable alternatives to Zebra’s card printers and provide effective
competition from a variety of companies, many of which are substantially larger than
Zebra. In addition, service bureaus compete for end user business and provide an
alternative to the purchase of our card printing equipment and supplies. Manufacturers
also use dye sublimation technology in their digital photo printers.
Our ability to compete effectively depends on a number of factors. These factors include
the reliability, quality and reputation of the manufacturer and its products; hardware
and software innovations and specifications; breadth of product offerings; information
systems connectivity; price; level of technical support; supplies and applications support
offered by the manufacturer; available distribution channels; and financial resources to
support new product design and innovation. We believe that Zebra presently competes
favorably with respect to these factors.
We face competition in one or more of our product lines from many competitors,
including the following (listed in alphabetical order): Altech; Argox; Canon; CIM; Cognitive
Solutions, a subsidiary of Axiohm Transaction Solutions; ColorX; Copal; Datacard;
Datamax, a unit of Dover Corporation; Evolis; Fargo Electronics; Fuji; Godex; Hewlett-
Packard; Hitachi; Intermec Technologies; Lexmark International; LogickaComp; MagiCard;
Matica; Microcom; Mitsubishi; NBS; Nisca; Olmec; O’Neil Product Development;
Olympus; Paxar; Polaroid; Printronix; Sato; Shinko; Song Woo Electronics; Sony; Taiwan
Semiconductor; Tokyo Electric Company; Victor Data Systems; Woosim; and Xerox.
Competition in the kiosk arena is vast. A few of the competitors we face include Custom
Engineering, Star Micronics, Epson, Citizen, Boca Systems and Practical Automation.
The supplies business is highly fragmented and competition is comprised of numerous
competitors of various sizes depending on the geographic area.
Alternative Printer Technologies
We believe thermal printing will be the label, card and receipt printer technology of
choice in Zebra’s target applications for the foreseeable future. Among the many
advantages of direct thermal and thermal transfer printing is the ability to print high-
resolution, durable images on a wide variety of label materials at relatively low costs
and high speeds compared with alternative printing technologies. We view passive RFID
smart label encoding and active RFID location systems as complementary technologies
to bar coded printing, offering significant growth opportunities to Zebra as the
technologies become more widely adopted.
If other technologies were to evolve or become available to Zebra, it is possible that those
technologies would be incorporated into our products. Alternatively, if such technologies
were to evolve or become available to our competitors, Zebra’s products may become
obsolete. This obsolescence would have a significant negative effect on Zebra’s business,
financial position, results of operations and cash flows.
refer to as Zebra Enterprise Solutions. In 2008, we will be integrating these businesses
into a single business unit, and intend to report their results separately from our specialty
printing business. Together, these companies give Zebra the ability to deliver more
high-value applications that help our customers identify, track and manage assets,
transactions and people. We consider these solutions natural adjacencies to our core
specialty printing business.
The solutions these companies provide are sold on a contract basis and are typically
installed over several quarters. These contracts cover a range of services, including
design, installation and ongoing maintenance services.
WhereNet Corp.
On January 25, 2007, we acquired WhereNet Corp., a provider of active RFID based
wireless solutions to track and manage enterprise assets, for $127 million in cash.
Headquartered in Santa Clara, California, WhereNet provides integrated wireless real-
time locating systems (RTLS) to companies primarily in the industrial manufacturing,
transportation and logistics, and aerospace and defense sectors. These systems
help companies locate and track high-value assets using battery-powered wireless
tags, fixed-position antennae and Web-enabled software. They are employed in parts
replenishment, vehicle inventory tracking, truck yard management, marine cargo
tracking, and work-in-process tracking, among many other applications.
WhereNet’s solutions encompass hardware, middleware, application software, and
services for project management, maintenance and support. Hardware consists primarily
of proprietary battery-powered RFID transponders and various RFID reading devices.
Manufacture of these products is accomplished by third-party contract manufacturers.
Middleware, application software and services are designed and delivered by WhereNet
personnel. Sales and service are made on a direct basis through contracts with end-user
customers, in addition to follow-on sales of transponders and support services.
Active RFID technology is the basis on which WhereNet solutions are designed and built.
Several companies compete with WhereNet employing multiple technologies aimed at
optimizing the performance of supply chain, asset tracking and logistics networks. These
technologies include passive RFID, other active RFID platforms, GPS-based technologies,
Wi-Fi-based technologies, and software platforms. Competing wireless location and
RFID-focused companies include Aeroscout Inc., Ekahau Inc., I.D. Systems Inc., Identec
Solutions, Intermec Inc., and RF Code Inc. Larger, diversified companies competing with
WhereNet include Cisco Systems Inc., Lockheed Martin Corp., Roper Industries, Inc.,
Siemens AG, and Motorola, Inc.
Therefore, we continually assess competitive and complementary methods of bar code
printer and other means of automatic identification. Alternative print technologies
assessed include ink jet, laser and direct marking. While we cannot be sure that new
technology will not supplant thermal printing for labels, cards and receipts, we are not
aware of any developing technology that offers the advantages of thermal printing for
our targeted applications. We continually monitor and evaluate new RFID technologies,
support their standards development, and rapidly adopt RFID into new Zebra products
and systems as new markets and applications emerge.
proveo AG
On July 2, 2007, we acquired proveo AG, for approximately $15 million in cash.
Headquartered in Crailsheim, Germany, proveo provides a complete hardware and
software system for tracking motorized vehicles utilizing GPS technology. Currently
deployed on airport ground support equipment (GSE), proveo solutions help ground
handlers manage GSE more effectively, increase safety and security, enhance quality
and reduce environmental impact. The proveo system helps reduce GSE investment and
operating costs by enabling improved vehicle management.
Zebra Enterprise Solutions
In 2007, we acquired WhereNet Corp., proveo AG and Navis Holdings, LLC, which we
The proveo solution consists of a transponder module that is wired into the vehicle to
monitor the vehicle’s operation and receive power. The module transmits vehicle location
and operating information. Application software enables visibility and management of
the GSE. Hardware manufacturing is performed by third-party contract manufacturers.
Sales and service are made on a direct basis through contracts with customers, as are
follow-on hardware sales and maintenance services.
The proveo solution uses primarily GPS location and general packet radio service
(GPRS) and Wi-Fi communication technologies. Competing technologies would include
proprietary communicating and locating systems. Several companies compete with
proveo in vehicle tracking and management, including I.D. Systems, Siemens, Amicus
and Pinnacle VTIS.
Navis Holdings, LLC
On December 14, 2007, we acquired Navis Holdings, LLC, for approximately $144 million
in cash. Headquartered in Oakland, CA, Navis provides software solutions to optimize
the flow of goods through marine terminals and other operations managing cargo in the
supply chain. Navis’ automated container terminal operating systems improve velocity
and visibility of cargo movement through ports and intermodal facilities. The Navis
suite of products helps companies enhance productivity, efficiency and profitability by
automating and integrating data input functions for real-time analysis and planning.
These products unite various functions to streamline workflow and reduce overhead,
administration and maintenance costs. Related services consist of product customization,
installation, training, maintenance and global support.
Marine terminals currently operate on systems from many systems providers, including
custom systems developed in-house. Of the larger companies, Navis competes with IBM,
Cosmos, Embarcadero Systems, and Tideworks Technology.
Enterprise Solutions Technology
RTLS combines advanced tracking software systems with active RFID technology. RTLS
asset tags enclose a company-designed 2.4GHz radio transmitter and battery inside a
rugged enclosure resistant to harsh fluids and outdoor conditions. The tags are easily
attached to vehicles, test equipment, containers, or other valuable mobile assets. The
tag uses spread-spectrum radio technology to regularly transmit a short message at pre-
programmed rates ranging from 1 second to multiple hours. Our radio and electronics
technology ensures reliable transmission and tag lives of up to 7 years. The transmitted
message is received by one or more company-designed location sensors which forward
the information to software that determines the tag’s current location and performs other
database functions and system management tasks. High-precision algorithms use Time
Difference of Arrival technology to determine a tag’s location within 1.5 meters, and thus
identify the location of the tracked asset.
Advanced algorithms within Zebra’s enterprise software use this real-time location
information to manage and plan the movement of people, equipment, and cargo. This
software runs on a variety of system platforms including UNIX, Linux, Microsoft®
Windows®, and the Mac OS®. Specialized software for marine terminals, yard
management, airports, and mobile asset management ensure data is provided in easily
understood, actionable form and is localizable into any language.
December 31, 2007.
ScanSource, Inc., is our most significant customer. Our net sales to ScanSource, an
international distributor of Zebra products, as a percent of our total net sales, were
as follows:
Percent of sales
year Ended December 31,
2007
16.5
2006
17.1
2005
15.6
No other customer accounted for 10% or more of total net sales during these years.
Sales
Sales by product category for the last three years were (in thousands):
year Ended December 31,
2007
2006
2005
Hardware
Supplies
Service and software
Shipping and handling
Cash flow hedging activities
$660,034
161,678
42,801
6,826
(3,060)
$578,002
150,709
25,664
6,022
(873)
Total sales
$868,279
$759,524
$540,679
129,183
25,217
5,575
1,617
$702,271
Sales to international customers, as a percent of net sales, were as follows:
Percent of sales
year Ended December 31,
2007
52.1
2006
50.0
2005
48.5
We believe that international sales have the long-term potential to grow faster than
domestic sales because of the lower penetration of automatic identification applications
outside North America. As a result, Zebra has invested resources to support our
international growth and currently operates facilities and sales offices, or has
representation, in 26 different countries.
Research and Development
Zebra had research and development expenditures as follows (in thousands, except
percentages):
Research and development expenses
(excluding acquired in process
research and development
Percent of sales
year Ended December 31,
2007
2006
2005
$57,600
6.6
$48,959
6.4
$47,359
6.7
Customers
Zebra has sold over 6,000,000 thermal printers to customers in about 100 countries as of
We devote significant resources to developing new printing solutions for our target
markets and ensuring that our efficiently manufactured products maintain high levels of
reliability. Research and development resources are also directed toward enhancing our
enterprise solutions systems.
on Zebra’s business, financial condition, operating results, and growth prospects.
Intellectual Property Rights
Zebra relies on a combination of trade secrets, patents, employee and third party
nondisclosure agreements, copyright laws and contractual rights to establish and protect
its proprietary rights in its products. We have and actively protect many domestic and
international trademarks. We hold 292 United States and foreign patents and have
225 United States and foreign patent applications pending pertaining to products.
The duration of these patents ranges from 5 months to 18 years. The expiration of any
individual patent would not have a significant negative impact on our business.
Despite our efforts to protect our intellectual property rights, it may be possible for
unauthorized third parties to copy portions of our products or to reverse engineer
or otherwise obtain and use some technology and information that we regard as
proprietary. Moreover, the laws of some countries do not afford Zebra the same
protection to proprietary rights, as do United States laws. There can be no assurance that
legal protections relied upon by Zebra to protect its proprietary position will be adequate.
While Zebra’s intellectual property is valuable and provides certain competitive
advantages, we do not believe that the legal protections afforded to our intellectual
property are fundamental to our success.
Patents have become increasingly used by businesses generally as a strategic business
tool and in recent years the number of patent applications and grants has risen
dramatically. As a result, it is increasingly important that Zebra takes appropriate steps to
maintain and develop its own patent portfolio and reduce the risk of disputes involving
third party intellectual property rights.
Other trademarks mentioned in this report are the property of their respective holders
and include IBM, a registered trademark of International Business Machines; Kodak, a
registered trademark of Eastman Kodak; UNIX, a registered trademark of UNIX Systems
Laboratories; MS/DOS and Windows, registered trademarks of Microsoft; SAP, a
registered trademark of SAP AG; Linux, a registered trademark of Linus Torvalds; and
Accelio Present Central, a registered trademark of Accelio. Bluetooth is a trademark
owned by Bluetooth SIG and used by Zebra under license.
Employees
As of January 25, 2008, Zebra employed approximately 3,200 persons. None of these
employees is a member of a union. We consider our employee relations to be very good.
additional Information
For financial information regarding Zebra, see Zebra’s Consolidated Financial Statements
and the related Notes, which are included in this Annual Report on Form 10-K. Zebra has
a single reportable segment for all of our operations and products. Financial information
about geographic areas is found in Note 17 to the Consolidated Financial Statements.
Item 1a. Risk Factors
Investors should carefully consider the risks, uncertainties and other factors described
below, as well as other disclosures in Management’s Discussion and Analysis of Financial
Condition and Results of Operations, because they could have a material adverse effect
Zebra could encounter difficulties in any acquisition it undertakes, including
unanticipated integration problems and business disruption. Acquisitions could also
dilute stockholder value and adversely affect operating results. Proposed acquisitions
that are not consummated may result in the write-off of certain acquisition costs.
Zebra may acquire or make investments in other businesses, technologies, services
or products. For example, in 2007 Zebra acquired WhereNet Corp., proveo AG, and
Navis Holdings, LLC, which together comprise what we refer to as the Zebra Enterprise
Solutions business. An acquisition may present business issues which are new to Zebra.
The process of integrating any acquired business, technology, service or product into
operations may result in unforeseen operating difficulties and expenditures. Integration
of an acquired company also may consume considerable management time and
attention, which could otherwise be available for ongoing operations and development of
the business. The expected benefits of any acquisition may not be realized. Acquisitions
also may involve a number of risks, including risks with respect to:
• Difficulties and uncertainties in transitioning the customers or other business
relationships from the acquired entities to Zebra,
• The loss of key employees of acquired entities,
• Ability of acquired entities to fulfill obligations to their customers,
• The discovery of unanticipated issues or liabilities,
• The failure of acquired entities to meet or exceed expected returns, and
• The acquired entities’ ability to improve internal controls and accounting systems to be
compliant with requirements applicable to public companies subject to SEC reporting.
Moreover, Zebra may be unable to identify, negotiate or finance future acquisitions
successfully. Future acquisitions could result in potentially dilutive issuances of equity
securities or the incurrence of debt, contingent liabilities or amortization expenses. To the
extent that a proposed acquisition is not consummated, Zebra may be required to write
off certain costs associated with the acquisition, which could be significant.
Zebra Enterprise Solutions is a new business.
Zebra has no prior experience operating businesses which are in the business conducted
by Zebra Enterprise Solutions. The Zebra Enterprise Solutions business provides
enterprise software solutions to customers which require implementation in complex
environments over extended periods of time and use percentage-of-completion
accounting, which has not been Zebra’s historic business. In addition, these companies
were privately-held and, therefore, not subject to the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002. Many steps must be taken for them to become compliant
during 2008, which will result in significant cost. Until they are in compliance, their non-
compliance could result in risks to our business.
Zebra is transferring final assembly of its thermal printers to Jabil Circuit and will be
totally dependent on Jabil for the manufacturing of such printers. Any failure by Jabil
to provide manufacturing services to Zebra as Zebra requires, or any disruption in such
manufacturing services, may adversely affect Zebra’s business results. Zebra expects this
transfer to be complete in the next 18-24 months.
In an effort to achieve additional cost savings and operational benefits, Zebra has
expanded its outsourcing activities to include the transfer of the final assembly of its
thermal printers to Jabil Circuit’s facility in HuangPu, China.
However, to the extent Zebra relies on a third party service provider such as Jabil for
manufacturing services, Zebra may incur increased business continuity risks. Zebra will no
longer be able to exercise control over the assembly of its thermal printers or any related
operations or processes, including the internal controls associated with operations and
processes conducted by Jabil and the quality of Zebra’s products assembled by Jabil.
If Zebra is unable to effectively develop and implement its outsourcing strategy, it may
not realize cost structure efficiencies and its operating and its financial results could be
materially adversely affected.
In addition, if for any reason Jabil experiences business difficulties or fails to meet Zebra’s
manufacturing needs, then Zebra may be unable to meet production requirements, may
lose revenue and may not be able to maintain its relationships with its customers. Without
Jabil’s continuing manufacture of Zebra’s products and the continuing operation of Jabil’s
facility, Zebra will have no other means of final assembly of its thermal printers until Zebra
is able to secure the manufacturing capability at another facility or develop an alternative
manufacturing facility, which could be costly and time consuming and have a material
adverse effect on Zebra’s operating and financial results.
The increased elements of risk that arise from conducting certain operating processes
in foreign jurisdictions may lead to an increase in reputational risk. During periods
of transition, greater operational risk and customer concern may exist regarding the
continuity of a high level of service delivery. The extent and pace at which Zebra is able to
move manufacturing functions to Jabil’s facility and the extent to which its customers are
affected by the transfer may be impacted by regulatory and customer acceptance issues.
Although Zebra carries business interruption insurance to cover lost revenue and profits in
an amount it considers adequate, this insurance does not cover all possible situations. In
addition, the business interruption insurance would not compensate Zebra for the loss of
opportunity and potential adverse impact, both short-term and long-term, on relations with
Zebra’s existing customers resulting from Zebra’s inability to produce products for them.
A third party service provider such as Jabil will have access to Zebra’s intellectual property,
which increases the risk of infringement or misappropriation of this intellectual property.
Adverse economic conditions, in the United States or internationally, or reduced
information technology spending may adversely impact our business.
A substantial portion of our business depends on our customers’ demand for our products
and services, the overall economic health of our current and prospective customers and
general economic conditions. These risks become more acute in periods of a slowing
economy or recession. The purchase of our products is often discretionary and may
involve a significant commitment of capital and other resources. Weak or unfavorable
economic conditions in the United States or internationally or within our customers’
respective industries, or a reduction in information technology spending even if economic
conditions improve, would likely adversely impact our business, operating results and
financial condition in a number of ways, including longer sales cycles, lower prices for our
products and services and reduced unit sales.
Zebra has significant operations outside the United States and sells a significant portion of
its products internationally and purchases important components from foreign suppliers.
In addition, the final assembly of its thermal printers is being transferred to a Chinese
facility. These circumstances create a number of risks.
Zebra has significant overseas operations, notably in the United Kingdom, Europe, Middle
East and Africa, Latin America and Asia Pacific, including, in particular, an increasing
presence in China, which presents added risks. In addition, Zebra sells a significant
amount of its products to customers outside the United States. Shipments to international
customers are expected to continue to account for a material portion of net sales.
Risks associated with operations, sales and purchases outside the United States include:
• Inadequately managing and overseeing operations that are distant and remote from
corporate headquarters,
• Fluctuating foreign currency rates could restrict sales, or increase costs of
purchasing, in foreign countries,
• Adverse changes in, or uncertainty of, local business laws or practices, including
the following:
• Foreign governments may impose burdensome tariffs, quotas, taxes, trade
barriers or capital flow restrictions,
• Restrictions on the export or import of technology may reduce or eliminate the
ability to sell in or purchase from certain markets,
• Political and economic instability may reduce demand for our products, or put our
foreign assets at risk,
• Potentially limited intellectual property protection in certain countries may limit
recourse against infringing products or cause Zebra to refrain from selling in certain
geographic territories,
• Staffing and managing international operations may be unusually difficult,
• A government controlled foreign exchange rate and limitations on the convertibility
of the Chinese Renminbi Yuan,
• The failure to implement and maintain adequate internal controls relating to these
operations,
• Transportation delays that may affect production and distribution of Zebra’s
products, and
• A limited telecommunications infrastructure.
Zebra may not be able to continue to develop products to address user needs effectively
in an industry characterized by rapid technological change.
To be successful, Zebra must adapt to rapidly changing technological and application
needs by continually improving its products as well as introducing new products and
services to address user demands.
Zebra’s industry is characterized by:
• Rapidly changing technology,
• Evolving industry standards,
• Frequent new product and service introductions,
• Evolving distribution channels, and
• Changing customer demands
Future success will depend on Zebra’s ability to adapt in this rapidly evolving
environment. Zebra could incur substantial costs if it has to modify its business to adapt
to these changes, and may even be unable to adapt to these changes.
Zebra competes in a highly competitive market, which is likely to become more
competitive. Competitors may be able to respond more quickly to new or emerging
technology and changes in customer requirements.
Zebra faces significant competition in developing and selling its systems. Principal
competitors have substantial marketing, financial, development and personnel resources.
To remain competitive, Zebra believes it must continue to provide:
• Technologically advanced systems that satisfy the user demands,
• Superior customer service,
• High levels of quality and reliability, and
• Dependable and efficient distribution networks.
Zebra cannot assure it will be able to compete successfully against current or future
competitors. Increased competition in printers or supplies may result in price reductions,
lower gross profit margins and loss of market share, and could require increased
spending on research and development, sales and marketing and customer support.
Some competitors may make strategic acquisitions or establish cooperative relationships
with suppliers or companies that produce complementary products. Any of these factors
could reduce Zebra’s earnings.
Zebra is vulnerable to the potential difficulties associated with the rapid increase in the
complexity of its business.
Zebra has grown rapidly over the last several years through domestic and international
growth and acquisitions. This growth has caused increased complexities in the business.
We believe our future success depends in part on our ability to manage our rapid growth
and increased complexities of our business and the demands from increased responsibility
on our management personnel. The following factors could present difficulties to us:
• Manufacturing an increased number of products,
• Increased administrative and operational burden,
• Maintaining and improving information technology infrastructure to support growth,
• Increased logistical problems common to complex, expansive operations, and
• Managing increasing international operations.
If we do not manage these potential difficulties successfully, our operating results
could be adversely affected. In addition, we may have difficulties managing associated
increased costs, which could adversely affect our operating margins.
Zebra sources some of its component parts from sole source suppliers.
A disruption in the supply of such component parts could have a material adverse effect
on our operations and financial results.
Infringement by Zebra or Zebra suppliers on the proprietary rights of others could put Zebra
at a competitive disadvantage, and any related litigation could be time consuming and costly.
Third parties may claim that Zebra or Zebra suppliers violated their intellectual property
rights. To the extent of a violation of a third party’s patent or other intellectual property
right, Zebra may be prevented from operating its business as planned, and may be
required to pay damages, to obtain a license, if available, or to use a non-infringing
method, if possible, to accomplish its objectives. Any of these claims, with or without
merit, could result in costly litigation and divert the attention of key personnel. If such
claims are successful, they could result in costly judgments or settlements. Also, as new
technologies emerge, such as RFID, the intellectual property rights of parties in such
technologies can be uncertain. As a result, products involving such technologies may have
higher risk of claims of infringement of the intellectual proprietary rights of third parties.
The inability to protect intellectual property could harm Zebra’s reputation, and its
competitive position may be materially damaged.
Zebra’s intellectual property is valuable and provides Zebra with certain competitive
advantages. Copyrights, patents, trade secrets and contracts are used to protect these
proprietary rights. Despite these precautions, it may be possible for third parties to copy
aspects of Zebra’s products or, without authorization, to obtain and use information
which Zebra regards as trade secrets.
Zebra may incur liabilities as a result of product failures due to actual or apparent design
or manufacturing defects.
Zebra may be subject to product liability claims, which could include claims for property
or economic damage or personal injury, in the event our products present actual or
apparent design or manufacturing defects. Such design or manufacturing defects may
occur not only in Zebra’s own designed products but also in components provided by
third party suppliers. A Zebra supplier has in the past provided us with defective lithium-
ion battery packs which were subject to a product recall. Zebra generally has insurance
protection against property damage and personal injury liabilities and also seeks to limit
such risk through product design, manufacturing quality control processes, product
testing and contractual indemnification from suppliers. However, due to the large and
growing size of Zebra’s installed printer base, a design or manufacturing defect involving
this large installed printer base could result in product recalls or customer service costs
that could have material adverse effects on Zebra’s financial results.
Larger orders may take longer to close and may not be completely fulfilled during a
particular quarter.
Zebra has been pursuing larger customer orders which typically involve a longer sales
cycle. Such orders are more difficult to forecast, and whether a larger order is received by
Zebra in a particular quarter or deferred to a later quarter could have a material effect on
the financial results of Zebra from quarter to quarter.
Zebra’s equipment is subject to U.S. and foreign regulations that pertain to electrical and
electronic equipment, which may materially adversely affect Zebra’s business.
These regulations influence the design, components or operation of such products.
New regulations and changes to current regulations are always possible and, in some
jurisdictions, regulations may be introduced with little or no time to bring related
products into compliance with these regulations. Zebra’s failure to comply with these
regulations may prevent Zebra from selling our products in a certain country. In addition,
these regulations may increase our cost of supplying the products by forcing us to
redesign existing products or to use more expensive designs or components. In these
cases, Zebra may experience unexpected disruptions in our ability to supply customers
with products, or we may incur unexpected costs or operational complexities to bring
products into compliance. This could have an adverse effect on Zebra’s revenues, gross
profit margins and results of operations and increase the volatility of our financial results.
Zebra is implementing a new company-wide enterprise resource planning (ERP) system.
The implementation process is complex and involves a number of risks that may
adversely affect Zebra’s business and results of operations.
Zebra is currently replacing its multiple legacy business systems at its different sites with
a new company-wide, integrated enterprise resource planning (ERP) system to handle
various business, operating and financial processes for Zebra and its subsidiaries. The
new system will provide a variety of important functions, such as order entry, invoicing,
accounts receivable, accounts payable, financial consolidation, logistics, and internal and
external financial and management reporting matters.
ERP implementations are complex and time-consuming projects that involve substantial
expenditures on system hardware and software and implementation activities that can
continue for several years. Such an integrated, wide-scale implementation is extremely
complex and requires transformation of business and financial processes in order to reap the
benefits of the ERP system. Significant efforts are required for requirements identification,
functional design, process documentation, data conversion, user training and post
implementation support. Problems in any of these areas could result in operational issues
including delayed shipments or production, missed sales, billing and accounting errors and
other operational issues. System delays or malfunctioning could also disrupt Zebra’s ability
to timely and accurately process and report key components of the results of its consolidated
operations, its financial position and cash flows, which could impact Zebra’s ability to timely
complete important business processes such as the evaluation of its internal controls and
attestation activities pursuant to Section 404 of the Sarbanes-Oxley Act of 2002.
Until the new ERP system is fully implemented and stabilized, Zebra expects to incur
additional selling, general and administrative expenses to stabilize the system, and
there can be no assurance that other issues relating to the ERP system will not occur or
be identified. Zebra’s business and results of operations may be adversely affected if it
experiences operating problems and/or cost overruns during the ERP implementation
process or if the ERP system and the associated process changes, do not function as
expected or give rise to the expected benefits.
Economic factors that are outside Zebra’s control could lead to deterioration in the quality
of Zebra’s accounts receivables.
Zebra sells its products to customers in the United States and several other countries
around the world. Sales are typically made on unsecured credit terms, which are
generally consistent with the prevailing business practices in a given country. A
deterioration of economic or political conditions in a country could impair Zebra’s ability
to collect on receivables in the affected country.
Zebra depends on the ongoing service of its senior management and ability to attract and
retain other key personnel.
Future success of Zebra is substantially dependent on the continued service and
continuing contributions of senior management and other key personnel. The loss of the
service of any executive officer or other key employees could adversely affect business.
The ability to attract, retain and motivate highly skilled employees is important to Zebra’s
long-term success. Competition for personnel in Zebra’s industry is intense, and Zebra
may be unable to retain key employees or attract, assimilate or retain other highly
qualified employees in the future.
Terrorist attacks or war could lead to further economic instability and adversely affect
Zebra’s stock price, operations, and profitability.
The terrorist attacks that occurred in the United States on September 11, 2001 caused
major instability in the U.S. and other financial markets. Possible further acts of terrorism
and current and future war risks could have a similar impact. Any such attacks could,
among other things, cause further instability in financial markets and could directly, or
indirectly through reduced demand, negatively affect Zebra’s facilities and operations or
those of its customers or suppliers.
Taxing authority challenges may lead to tax payments exceeding current reserves.
Zebra is subject to ongoing tax examinations in various jurisdictions. As a result, we
may record incremental tax expense based on expected outcomes of such matters. In
addition, we may adjust previously reported tax reserves based on expected results of
these examinations. Such adjustments could result in an increase or decrease to Zebra’s
effective tax rate.
Item 1B. unresolved Staff Comments
Not applicable.
Item 2. Properties
Zebra’s corporate headquarters are located in Vernon Hills, Illinois, a northern suburb of
Chicago. Zebra conducts its operations from a custom-designed facility at this location,
which provides approximately 225,000 square feet of space. Approximately 113,000 square
feet have been allocated to office and laboratory functions and 112,000 square feet to
manufacturing and warehousing. This facility was constructed in 1989 and expanded in
1993, 1995, 1996 and 1999. It is leased to Zebra under a lease terminating on June 30, 2014.
Zebra’s principal facilities as of December 31, 2007, are listed below:
Location
Square Footage
manufacturing, administrative,
Production &
Warehousing
Research
& Sales
Total
Lease Expires
Vernon Hills, Illinois, USA
111,676
113,429
225,105
June 2014
Vernon Hills, Illinois, USA
—
34,000
34,000
February 2009
Camarillo, California, USA
Warwick, Rhode Island, USA
Santa Clara, California, USA
Oakland, California, USA
Greenville, Wisconsin, USA
Otay Mesa, California, USA
McAllen, Texas, USA
97,921
24,516
—
—
45,000
25,100
15,500
Flowery Branch, Georgia, USA
18,115
Heerenveen, The Netherlands
48,427
High Wycombe, UK
—
72,156
170,077
Owned by Zebra
75,324
99,840
April 2009
20,757
20,757
December 2009
36,553
36,553
October 2009
5,000
4,900
2,500
2,145
46,145
24,700
50,000
March 2018
30,000
September 2011
18,000
September 2011
20,260
April 2012
94,572
January 2010
24,700
October 2018
Preston, UK
Total
30,450
8,600
39,050
Owned by Zebra
416,705
446,209
862,914
Zebra leases various other facilities around the world, which are dedicated to
administrative, research and sales functions. The amounts related to these leases, solely
or in aggregate, are not material to the consolidated financial statements.
Item 3. Legal Proceedings
See Note 16 in the Notes to the Consolidated Financial Statements included in this Form 10-K.
Item 4. Submission of matters to a Vote of Security Holders
Item 6. Selected Consolidated Financial Data
COnSOLIDaTED STaTEmEnTS OF EaRnInGS DaTa
(In thousands, except per share amounts)
year Ended December 31,
2007
2006
2005
2004
2003
$ 868,279
$759,524
$702,271
$ 663,054
$536,397
Net sales
Cost of sales
Gross profit
Total operating expenses
Operating income
Income before income taxes
and cumulative effect of
accounting change
Income before cumulative
effect of accounting change
Cumulative effect of
accounting change
451,161
417,118
273,933
143,185
401,104
358,420
277,991(1)
80,429
348,851
353,420
207,392
146,028
320,951
342,103
175,494
166,609
264,564
271,833
150,882
120,951
167,375
101,642
160,282
176,084
127,725
110,113
69,627
106,184
115,141
86,357
—
1,319(2)
—
—
—
Net income
$ 110,113
$ 70,946
$106,184
$ 115,141
$ 86,347
Earnings per share before
cumulative effect of
accounting change
Basic
Diluted
Earnings per share
Basic
Diluted
Weighted average
shares outstanding
Basic
Diluted
$
$
$
$
1.61
1.60
1.61
1.60
$ 0.99
$ 1.49
$ 0.98
$ 1.47
$ 1.01
$ 1.49
$ 1.00
$ 1.47
$
$
$
$
1.61
1.59
$ 1.22
$ 1.21
1.61
1.59
$ 1.22
$ 1.21
68,463
68,908
70,516
70,956
71,364
72,000
71,556
72,398
70,647
71,495
Not applicable.
PaRT II
Item 5. market for Registrant’s Common Stock, Related Stockholder
matters and Issuer Purchases of Equity Securities
Stock Information: Price Range and Common Stock
Our Class A Common Stock is traded on the NASDAQ Stock Market under the symbol
ZBRA. The following table shows the high and low trade prices for each fiscal quarter in
2007 and 2006, as reported by the NASDAQ Stock Market.
2007
High
Low
2005
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$42.38 $33.70
37.98
32.93
32.93
41.49
42.50
39.09
Source: The NASDAQ Stock Market
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$47.97 $42.16
32.41
45.39
29.23
36.60
33.98
37.74
At February 22, 2008, the last reported price for the Class A Common Stock was $29.38
per share, and there were 380 registered stockholders of record for Zebra’s Class A
Common Stock. In addition, we had approximately 16,500 stockholders who owned
Zebra stock in street name.
Dividend Policy
Since our initial public offering in 1991, we have not declared any cash dividends or
distributions on our capital stock. Zebra currently intends to retain its earnings to finance future
growth and therefore does not anticipate paying any cash dividends in the foreseeable future.
Treasury Shares
During the fourth quarter of 2007, Zebra purchased 1,768,359 shares of Zebra’s Class A
common stock as follows:
Period
October 2007
(September 30 – October 27)
November 2007
(October 28 – November 24)
December 2007
(November 25 – December 31)
Total
Total
number
of shares
purchased
average
price paid
per share
Total number of
shares purchased
as part of publicly
announced program
maximum number
of shares that may
yet be purchased
under the program
—
$ —
—
2,149059
540,204
$36.70
540,204
1,608,855
1,228,155
$35.30
1,768,359
$35.73
1,228,155
1,768,359
380,700
380,700
(1) On October 4, 2005, Zebra announced that the Board authorized the purchase of up to 2,500,000 shares of
Zebra common stock at prices to be determined at management’s discretion. There was no expiration on the
authorization. On August 1, 2007, Zebra announced that the Board authorized the purchase of an additional
3,000,000 shares under the same terms. All shares authorized by the Board in 2005 have been purchased and all
remaining shares authorized for purchase were authorized under the Board’s 2007 authorization.
COnSOLIDaTED BaLanCE SHEET DaTa
(In thousands)
Results of Operations: Fourth Quarter of 2007 versus Fourth Quarter of 2006, Year ended
December 31, 2007 versus Year ended December 31, 2006
2007
2006
2005
2004
2003
December 31,
Sales
Sales by product category, percent change, and percent of total sales for the three
months and year ended December 31, 2007, and December 31, 2006, were (in thousands,
except percentages):
Product Category
2007
2006 Change
Three months Ended
December 31,
Percent of Percent of
Percent Total Sales Total Sales
2006
2007
Cash and cash equivalents,
restricted cash and
investments and
marketable securities
(current and long-term)(4) $281,179
298,660
Working capital
Total assets
Long-term obligations (3)
Stockholders’ equity
1,034,278
8,452
$559,189
$544,239
$557,993
$447,848
404,836
963,142
9,969
680,554
918,415
7,709
665,062
868,044
4,011
535,816
706,530
2,853
Hardware
Supplies
Service and software
Shipping and handling
$177,394 $ 163,081
41,580
14,120
1,744
38,578
6,954
1,610
902,693
877,681
857,972
803,893
657,557
Cash flow hedging activities
(1,265)
(320)
(1) Includes litigation settlement of $53,392,000 and insurance receivable reserve of $12,543,000.
(2) Relates to the estimation of forfeitures on prior year compensation expense outstanding at the adoption date
of SFAS No. 123(R), Share-Based Payment. See Note 3 in the Notes to the Consolidated Financial Statements
included in this Form 10-K.
(3) Long-term obligations include deferred compensation and unearned revenue. See Note 18 in the Notes to
the Consolidated Financial Statements included in this Form 10-K for further discussion of the Deferred
Compensation Plan.
(4) The decrease in cash and cash equivalents, restricted cash and investments and marketable securities was
principally the result of our acquisitions of WhereNet, proveo AG, and Navis during 2007. See Note 4 in the Notes
to the Consolidated Financial Statements included in this Form 10-K for further discussion of these acquisitions.
Total sales
$233,573
$209,903
year Ended
December 31,
Product Category
2007
2006 Change
Hardware
Supplies
$660,034
$578,002
161,678
150,709
Service and software
42,801
25,664
Item 7. management’s Discussion and analysis of Financial Condition
Cash flow hedging activities
(3,060)
Shipping and handling
6,826
6,022
(873)
and Results of Operations
Total sales
$868,279
$759,524
8.8
7.8
103.0
8.3
NM
11.3
75.9
17.8
6.0
0.8
(0.5)
100.0
77.7
18.4
3.3
0.8
(0.2)
100.0
Percent of Percent of
Percent Total Sales Total Sales
2006
2007
14.2
7.3
66.8
13.4
NM
14.3
76.1
18.6
4.9
0.8
(0.4)
100.0
76.1
19.8
3.4
0.8
(0.1)
100.0
Net sales for the fourth quarter of 2007, compared with the fourth quarter of 2006,
increased 11.3%, principally on the strength of sales in our Europe/Middle East and Africa
and Latin American sales regions. Continued robust sales growth of our established
printer and service lines were supplemented by sales from recently acquired businesses.
Gross margin expanded due to improved manufacturing variances and favorable
exchange rate movements, offset by an unfavorable change in product mix. Higher
operating expenses resulted from increases in payroll costs and recent acquisitions. In
addition, operating expenses include $632,000 in charges related to the retirement of
former CEO Ed Kaplan and Board of Director project activities related to the search and
hiring of a new chief executive officer.
Sales for the full year increased by 14.3% over 2006, with North American growth holding
near 10%. International sales were strong and were fueled by favorable foreign exchange
movements. Gross margin increased 0.8 points from 2006 with decreases to manufacturing
variances. Operating expenses were adversely affected during 2007 by the acquisitions
during the year as well as other payroll increases. Year to-date operating expenses also
include $3,233,000 in charges related to the retirement of former CEO Ed Kaplan and Board
of Director project activities related to the search and hiring of a new chief executive officer.
Sales to customers by geographic region, percent changes and percent of total sales for
the three months and year ended December 31, 2007, and December 31, 2006, were (in
thousands, except percentages):
Geographic Region
2007
2006 Change
Three months Ended
December 31,
Percent of Percent of
Percent Total Sales Total Sales
2006
2007
Europe, Middle East
and Africa
Latin America
Asia-Pacific
Total International
North America
Total sales
$ 93,895
$ 74,440
15,452
16,100
13,854
16,723
125,447
105,017
108,126
104,886
$233,573
$209,903
26.1
11.5
(3.7)
19.5
3.1
11.3
40.2
6.6
6.9
53.7
46.3
35.5
6.6
7.9
50.0
50.0
100.0
100.0
Geographic Region
2007
2006 Change
year Ended
December 31,
Percent of Percent of
Percent Total Sales Total Sales
2006
2007
Europe, Middle East
and Africa
Latin America
Asia-Pacific
Total International
North America
Total sales
$320,225
$264,711
60,090
71,871
53,619
61,374
452,186
379,704
416,093
379,820
$868,279
$759,524
21.0
12.1
17.1
19.1
9.6
14.3
36.9
6.9
8.3
52.1
47.9
34.8
7.1
8.1
50.0
50.0
100.0
100.0
Ongoing strength in international territories, with notable growth in Europe, Middle
East and Africa (EMEA) of 21.0% for the full year and 26.1% for the fourth quarter, over
comparable 2006 periods, helped drive overall sales growth in 2007. For 2007, sales
growth benefited from a 12.4% unit volume increase spread broadly across our printer
product lines, offset by a decline in average unit prices. Sales growth also benefited from
strong growth in service and software sales, which is a result of our recent acquisitions.
Favorable foreign exchange movements added 3.9 percentage points to consolidated
growth and 11.0 percentage points to growth in EMEA for the fourth quarter.
New printer products (defined as printers released within 18 months prior to the end of
the applicable fiscal period) as a percent of total printer product sales were as follows:
Three months ended
Year ended
December 31,
2007
16.5
11.0
2006
12.8
13.0
Zebra’s international sales are denominated in multiple currencies, primarily the dollar,
pound and euro, which subjects our reported sales to fluctuations based on changes in
currency rates. We hedge a portion of anticipated euro-denominated sales to protect
Zebra against exchange rate movements. Inclusive of all hedging activities, the impact
of foreign exchange movements on reported sales during the fourth quarter was a
gain of $8,187,000. The full year impact was a gain of $23,331,000. See Note 15 to the
Consolidated Financial Statements included in this report for a more detailed discussion
of the above hedging program.
Printer unit volumes and average selling price information is summarized below:
Total printers shipped
Average selling price of printers shipped
Total printers shipped
Three months Ended
December 31,
2007
235,267
$600
2006
226,625
$596
year Ended December 31,
2007
919,909
2006
818,413
Percent
Change
3.8
0.7
Percent
Change
12.4
Average selling price of printers shipped
$581
$598
(2.8)
For 2007, printer unit volumes for nearly all printer categories increased, with notable
strength in mid-range, mobile and desktop printers. For the full year, lower average
selling prices across the full line of printers in addition to a mix shift toward lower priced
products resulted in a 2.8% decrease in the average selling price of printers shipped.
Gross Profit
Gross profit information is summarized below (in thousands, except percentages):
December 31,
2007
2006
Percent
Change
Percent of
Percent of
Total Sales Total Sales
2006
2007
Three months ended
Year ended
$113,298
417,118
$ 98,410
358,420
15.1
16.4
48.5
48.0
46.9
47.2
The improvement in gross profit margin for the fourth quarter was due to favorable foreign
exchange movements and lower variances offset by an unfavorable product mix change.
Selling and Marketing Expenses
Selling and marketing expenses are summarized below (in thousands, except percentages):
December 31,
2007
2006
Percent
Change
Percent of
Percent of
Total Sales Total Sales
2006
2007
Three months ended
Year ended
$35,702
121,996
$27,702
96,788
28.8
26.0
15.3
14.1
13.2
12.7
During the fourth quarter of 2007, selling and marketing expenses increased due to higher
payroll costs of $6,326,000. For the full year, the payroll costs increased $17,691,000,
advertising and market development funding increased $1,131,000, professional services
increased $472,000 and travel and entertainment expenses increased $1,518,000. These
increases are related, in part, to recent acquisitions, which increased selling and marketing
expenses by $3,726,000 during the fourth quarter and $9,255,000 for the full year of 2007.
Research and Development Costs
The development of new products and enhancement of existing products are important
to Zebra’s business and growth prospects. To maintain and build our product pipeline,
we made investments in research and development, summarized below (in thousands,
except percentages):
December 31,
2007
2006
Percent
Change
Percent of
Percent of
Total Sales Total Sales
2006
2007
Three months ended
Year ended
$15,642
57,600
$12,768
48,959
22.5
17.6
6.7
6.6
6.1
6.4
Quarterly product development expenses fluctuate widely depending on the status of
ongoing projects. We are committed to a long-term strategy of significant investment
in product development. For the fourth quarter of 2007, research and development
costs increased due to higher payroll costs of $2,346,000. For the full year, research and
development costs increased as a result of increased payroll costs of $6,950,000 and
higher professional services costs of $1,543,000. These increases are related, in part, to
recent acquisitions, which increased research and development expenses by $2,336,000
during the fourth quarter and $7,387,000 for the full year of 2007.
Three months ended
Year ended
$ 36,862
143,185
$ 25,719
80,429
43.3
78.0
15.8
16.5
12.3
10.6
General and Administrative Expenses
General and administrative expenses are summarized in the table below (in thousands,
except percentages):
December 31,
2007
2006
Percent
Change
Percent of
Percent of
Total Sales Total Sales
2006
2007
Three months ended
Year ended
$21,854
81,356
$18,284
62,656
19.5
29.8
9.4
9.4
8.7
8.2
Investment income
Interest expense
For the fourth quarter of 2007, general and administrative expenses increased due
primarily to higher payroll costs of $2,926,000. For the full year, general and administrative
expenses increased due to higher payroll costs of $12,911,000, and information systems
expense increased $1,546,000 for the full year of 2007. These increases are related, in part,
to recent acquisitions, which increased general and administrative expenses by $1,088,000
during the fourth quarter and $2,138,000 for the full year of 2007.
Amortization of Intangible Assets
Amortization of intangible assets increased during 2007 due to our recent acquisitions of
WhereNet, proveo and Navis. See Note 4 of the Consolidated Financial Statements included
in this Annual Report on Form 10-K for a more detailed discussion of the recent acquisitions.
Settlement and Licensing Agreement with Paxar Americas, Inc.
During the third quarter of 2006, Zebra paid $63,750,000 to settle all issues surrounding
the litigation with Paxar Americas, Inc. Of this amount, $53,392,000 was included as
operating expense. The remaining $10,358,000 was capitalized as an intangible asset
related to future use of patents and other licenses and are being amortized over 4 to 7
years resulting in an incremental charge of $456,000 per quarter.
Insurance Receivable Reserve
During 2006, a Zebra reseller filed for bankruptcy protection in Austria. At the time of
the filing, the reseller owed various Zebra subsidiaries a total of $12,065,000. The entire
balance due to Zebra was guaranteed by Condor Insurance, a Nevis-based insurance
company through a United Kingdom insurance broker. During June 2006, Zebra initiated
a suit in the U.K. courts to enforce the guarantee. However, during the fourth quarter
of 2006, we discovered that the insurance company’s financial position was such that
it may not be able to pay the judgment awarded to us. We reviewed the situation and
determined that a loss was probable and as of December 31, 2006 reserved 100% of the
balance due, which was $12,543,000.
Operating Income
Operating income is summarized in the following table (in thousands, except percentages):
December 31,
2007
2006
Percent
Change
Percent of
Percent of
Total Sales Total Sales
2006
2007
Non-operating Income and Expenses
Zebra’s non-operating income and expense items are summarized in the following table
(in thousands):
Three months Ended
December 31,
year Ended
December 31,
2007
$8,545
49
553
182
2006
$6,980
(16)
(822)
(170)
2007
$23,966
(44)
523
(255)
2006
$23,182
(252)
(635)
(1,082)
Foreign exchange gains (losses)
Other, net
Total other income
$9,329
$5,972
$24,190
$21,213
Rate of Return analysis:
Average cash and marketable
securities balances
$375,269
$553,406
$420,184
$551,714
Annualized rate of return
9.1%
5.0%
5.7%
4.2%
During 2007, we began liquidating all of our interests in our partnership holdings. As
a result of these liquidations, we recorded investment income of $9,246,000 related
to gains on the liquidations of the partnerships during 2007, $4,369,000 of which was
recognized in the fourth quarter.
Income Taxes
The effective income tax rate for the fourth quarter was 33.3% compared with 32.3%
for the same quarter last year. For the full year of 2007, the effective income tax rate
was 34.2% versus 31.5% for 2006. The increase in the effective tax rate is a result of the
increased impact in 2006 of permanent tax differences, including tax-exempt interest
income, on the effective income tax rate due to lower taxable income as a result of the
Paxar settlement. In addition, we reduced tax reserves in 2006 totaling $1,189,000 related
to the completion of various state tax audits and 2005 state income tax returns.
Income before Cumulative Effect of Accounting Change
Zebra’s income before cumulative effect of accounting change is summarized below (in
thousands, except per share amounts):
Income before cumulative
effect of accounting change
Diluted earnings per share
before cumulative effect
of accounting change
Three months Ended
December 31,
year Ended
December 31,
2007
2006
2007
2006
$ 30,803
$ 21,446
$ 110,113
$ 69,627
$ 0.45
$ 0.30
$
1.60
$
0.98
Cumulative Effect of Accounting Change
During the first quarter of 2006, Zebra adopted SFAS No. 123(R), Share-Based Payment,
using the modified retrospective approach. SFAS No. 123(R) requires entities to estimate
the number of forfeitures expected to occur and record expense based upon the number
of awards expected to vest. Prior to the adoption of SFAS No. 123(R), Zebra accounted
for forfeitures as they occurred as permitted under previous accounting standards. The
requirement to estimate forfeitures is classified as an accounting change, and SFAS No.
123(R) required a one-time adjustment in the period of adoption. The one-time adjustment
(cumulative effect of accounting change) related to the change in estimating forfeitures
increased income by $1,319,000, net of applicable taxes.
Net Income
Zebra’s net income is summarized below (in thousands, except per share amounts):
Three months Ended
December 31,
year Ended
December 31,
2007
2006
2007
2006
Net income
Diluted earnings per share
$ 30,803
$ 0.45
$21,446
$ 0.30
$ 110,113
1.60
$
$ 70,946
1.00
$
Latin America (14.4%) and Europe, Middle East and Africa (EMEA) (13.5%). Sales growth
also benefited from strong growth in supplies sales and an increase in North American
sales. Favorable foreign exchange movements added $3,606,000 to consolidated growth
during 2006. New printer products as a percent of total printer product sales was 13.0%
for 2006, compared to 10.7% for 2005.
Printer unit volumes and average selling price information is summarized below:
Total printers shipped
Average selling price of printers shipped
year Ended December 31,
2006
818,413
$598
2005
720,306
$633
Percent
Change
13.6
(5.5)
For all of 2006, with the exception of card printers, unit volumes increased in nearly all
product lines, with notable strength in mobile, desktop and high-end printers. In addition,
lower average selling prices and a mix toward lower priced products resulted in a 5.5%
decrease in the average selling price of printers shipped.
Comparison of years Ended December 31, 2006 and 2005
Gross Profit
Gross profit information is summarized below (in thousands except percentages):
Sales
Sales by product category, related percent changes and percent of total sales for 2006
and 2005 were as follows:
Percent of Percent of
year ended December 31, Percent Total Sales Total Sales
2005
Change
2006
2006
2005
Product Category
Hardware
Supplies
$578,002
$540,679
150,709
129,183
Service and software
Shipping and handling
25,664
6,022
Cash flow hedging activities
(873)
25,217
5,575
1,617
Total sales
$759,524
$702,271
6.9
16.7
1.8
8.0
NM
8.2
76.1
19.8
3.4
0.8
(0.1)
100.0
77.0
18.4
3.6
0.8
0.2
100.0
Sales to customers by geographic region, related percent changes, and percent of total
sales for 2006 and 2005 were as follows:
Geographic Region
Europe, Middle East
and Africa
Latin America
Asia-Pacific
Total International
North America
Total sales
Percent of Percent of
year ended December 31, Percent Total Sales Total Sales
2005
Change
2006
2006
2005
$264,711
$233,306
53,619
61,374
379,704
379,820
46,878
60,033
340,217
362,054
$759,524
$702,271
13.5
14.4
2.2
11.6
4.9
8.2
34.8
7.1
8.1
50.0
50.0
33.3
6.7
8.5
48.5
51.5
100.0
100.0
Sales growth for 2006 was a result of strength in international territories, most notably,
For the year Ended
December 31, 2006
December 31, 2005
Percent Change
Gross Profit
$358,420
353,420
1.4
Percent of
Total Sales
47.2
50.3
Gross margin decreased largely because of:
• Increases to excess inventory and cost change reserves,
• Less favorable purchase price variances,
• Cycle count adjustments,
• Overhead spending and labor variances related to facility expansion in the supplies
organization,
• Higher cost components required for RoHS Legislation compliance,
• Pricing and negative product mix in the first and second quarters, and
• Negative foreign exchange comparisons in the first quarter.
Selling and Marketing Expenses
Selling and marketing expenses are summarized below (in thousands, except percentages):
For the year Ended
December 31, 2006
December 31, 2005
Percent Change
Selling and
marketing Expenses
Percent of
Total Sales
$96,788
91,630
5.6
12.7
13.0
Higher selling and marketing expenses were a result of increased payroll costs of
$4,587,000 and trade show expenses of $690,000. In addition to increases in the items
mentioned above, outside commissions, advertising and building expenses increased
during 2006. The increased staffing was primarily focused on increasing our presence
in targeted geographical territories to support growth in those regions, building sales
and marketing teams to deliver vertical market applications, and strengthening strategic
alliances with complementary companies.
Research and Development Costs
Research and development costs are summarized below (in thousands, except percentages):
For the year Ended
December 31, 2006
December 31, 2005
Percent Change
Research and
Development Costs
Percent of
Total Sales
$48,959
47,359
3.4
6.4
6.7
For 2006, research and development expenses increased primarily due to increases in
payroll costs of $4,533,000 and professional services of $230,000, offset by a decrease
in project expenses of $3,179,000. Included in the 2005 project expenses are write-
offs of tooling and other materials related to product development in the amount of
$2,726,000. Also during 2005, we incurred research and development costs, which totaled
$2,882,000, to re-engineer our products to make them compliant with new environmental
laws that went into effect in 2006.
General and Administrative Expenses
General and administrative expenses are summarized below (in thousands, except
percentages):
For the year Ended
December 31, 2006
December 31, 2005
Percent Change
General and
administrative Expenses
Percent of
Total Sales
$62,656
64,050
(2.2)
8.2
9.1
For 2006, general and administrative expenses were affected by:
• Higher payroll costs of $2,350,000,
• Higher information systems expenses of $1,718,000,
• Increased bad debt expenses of $944,000, and
• Higher professional services and recruiting of $725,000.
These increases were more than offset by lower legal expenses of $7,373,000, which was
related to the resolution of the litigation with Paxar Americas, Inc., as described below.
Settlement and Licensing Agreement with Paxar Americas, Inc.
During the third quarter of 2006, Zebra paid $63,750,000 to settle all issues surrounding
the litigation with Paxar Americas, Inc. Of this amount, $53,392,000 was included as
operating expense. The remaining $10,358,000 was capitalized as an intangible asset
related to future use of patents and other licenses and are being amortized over 4 to 7
years resulting in an incremental charge of $456,000 per quarter.
Insurance receivable reserve
During 2006, a Zebra reseller filed for bankruptcy protection in Austria. At the time of
the filing, the reseller owed various Zebra subsidiaries a total of $12,065,000. The entire
balance due to Zebra is guaranteed by Condor Insurance, a Nevis-based insurance
company through a United Kingdom insurance broker. During June 2006, Zebra initiated
a suit in the U.K. courts to enforce the guarantee. However, during the fourth quarter,
we discovered that the insurance company’s financial position was such that it may not
be able to pay the judgment awarded to us. We reviewed the situation and determined
that a loss is probable, and, therefore, reserved 100% of the balance due, which was
$12,543,000 at December 31, 2006.
Operating Income
Operating income is summarized in the following table (in thousands, except percentages):
For the year Ended
December 31, 2006
December 31, 2005
Percent Change
Operating Income
$ 80,429
146,028
(44.9)
Percent of
Total Sales
10.6
20.8
Non-operating Income and Expenses
Zebra’s non-operating income and expense items are summarized in the following table
(in thousands):
year Ended December 31,
Investment income
Interest expense
Foreign exchange gains (losses)
Other, net
Total other income (expense)
2006
$23,182
(252)
(635)
(1,082)
$21,213
2005
$13,417
(79)
1,286
(370)
$14,254
Rate of Return Analysis:
Average cash and marketable securities balance
Annualized rate of return
$551,714
4.2%
$551,116
2.4%
Income Taxes
The effective income tax rate for 2006 was 31.5% versus 33.8% in 2005. During 2005, we
reduced tax reserves as a result of favorable resolution of certain tax audits. In addition,
we took advantage of the deduction for qualified domestic production activities included
in the American Jobs Creation Act of 2004. The decrease in the effective tax rate is
a result of the increased impact of permanent tax differences, including tax-exempt
interest income, on the effective income tax rate due to lower taxable income as a result
of the Paxar settlement. In addition, we reduced tax reserves in 2006 totaling $1,189,000
related to the completion of various state tax audits and 2005 state income tax returns.
Income before Cumulative Effect of Accounting Change
Zebra’s income before cumulative effect of accounting change is summarized below (in
thousands, except per share amounts):
year Ended December 31,
2006
2005
Income before cumulative effect
of accounting change
Diluted earnings per share before
cumulative effect of accounting change
$ 69,627
$ 0.98
$ 106,184
$ 1.47
continue to experience return rates consistent with historical patterns. Historically,
our product returns have not been significant. However, if a significant issue should
arise, it could have a material impact on our financial statements.
Cumulative Effect of Accounting Change
During the first quarter of 2006, Zebra adopted SFAS No. 123(R), Share-Based Payment,
using the modified retrospective approach. SFAS No. 123(R) requires entities to estimate
the number of forfeitures expected to occur and record expense based upon the number
of awards expected to vest. Prior to the adoption of SFAS No. 123(R), Zebra accounted
for forfeitures as they occurred as permitted under previous accounting standards. The
requirement to estimate forfeitures is classified as an accounting change, and SFAS
No. 123(R) required a one-time adjustment in the period of adoption. The one-time
adjustment (cumulative effect of accounting change) related to the change in estimating
forfeitures increased income by $1,319,000, net of applicable taxes.
Net Income
Zebra’s net income is summarized below (in thousands, except per share amounts):
Net income
Diluted earnings per share
year Ended December 31,
2006
$ 70,946
$ 1.00
2005
$ 106,184
$ 1.47
Critical accounting Policies and Estimates
Management prepared the consolidated financial statements of Zebra Technologies
Corporation under accounting principles generally accepted in the United States of
America. These principles require the use of estimates, judgments and assumptions. We
believe that the estimates, judgments and assumptions we used are reasonable, based
upon the information available.
Our estimates and assumptions affect the reported amounts in our financial statements.
The following accounting policies comprise those that we believe are the most critical in
understanding and evaluating Zebra’s reported financial results.
Revenue Recognition
Product revenue is recognized once four criteria are met: (1) we have persuasive evidence
that an arrangement exits; (2) delivery has occurred and title has passed to the customer,
which happens at the point of shipment provided that no significant obligations remain;
(3) the price is fixed and determinable; and (4) collectibility is reasonably assured. Other
items that affect our revenue recognition include:
Customer Returns
Customers have the right to return products that do not function properly within
a limited time after delivery. We monitor and track product returns and record a
provision for the estimated future returns based on historical experience and any
notification received of pending returns. Returns have historically been within
expectations and the provisions established, but Zebra cannot guarantee that it will
Growth Rebates
Some of our channel program partners are offered incentive rebates based on the
attainment of specific growth targets related to products they purchase from us over
a quarter or year. These rebates are recorded as a reduction to revenue. Each quarter,
we estimate the amount of outstanding volume rebates and establish a reserve for
them based on shipment history. Historically, actual volume rebates have been in line
with our estimates.
Price Protection
Some of our customers are offered price protection by Zebra as an incentive to carry
inventory of our product. These price protection plans provide that if we lower prices,
we will credit them for the price decrease on inventory they hold. We estimate future
payments under price protection programs quarterly and establish a reserve, which is
charged against revenue. Our customers typically carry limited amounts of inventory,
and Zebra infrequently lowers prices on current products. As a result, the amounts
paid under theses plans have been minimal.
Software Revenue
We sell four types of software and record revenue as follows:
• Our enterprise solutions group has fixed fee software implementation projects,
for which we use the percentage of completion method for revenue recognition.
Under this method of accounting, we recognize revenue based on the ratio of
costs incurred to total estimated costs. If increases in projected costs-to-complete
are sufficient to create a loss contract, the entire estimated loss is charged to
operations in the period the loss first becomes known.
• Our printers contain embedded firmware, which is part of the hardware purchase.
We consider the sale of this firmware to be incidental to the sale of the printer and
do not attribute any revenue to it.
• We sell a limited amount of prepackaged, or off-the-shelf, software for the creation
of bar code labels using our printers. There is no customization required to use this
software, and we have no post-shipment obligations on the software. Revenue is
recognized at the time this prepackaged software is shipped.
• We sometimes provide custom software as part of a printer installation project.
We bill custom software development services separate from the related hardware.
Revenue related to custom software is recognized once the custom software
development services have been completed and accepted by the customer.
Shipping and Handling
We charge our customers for shipping and handling services based upon our internal
price list for these items. The amounts billed to customers are recorded as revenue
when the product ships. Any costs incurred related to these services are included in
cost of sales.
From time to time, Zebra will enter into sales transactions that include more than one
product type. This bundle of products might include printers, current or future supplies,
and services. When this type of transaction occurs, we allocate the purchase price to each
product type based on the fair value of the individual products. The revenue for each
individual product is then recognized when the earning process for that product is fully met.
Investments and Marketable Securities
Investments and marketable securities at December 31, 2007, consisted of the following:
U.S. government securities
State and municipal bonds
Corporate bonds
Partnership interests
13.1%
81.1%
1.3%
4.5%
We classify our debt and marketable equity securities in one of three categories: trading,
available-for-sale or held-to-maturity. Trading securities are bought and held principally
for the purpose of selling them in the near term. Held-to-maturity securities are those
debt securities that Zebra has the ability and intent to hold until maturity. All securities
not included in trading or held-to-maturity are classified as available-for-sale, except for
partnership interests described below.
Trading and available-for-sale securities are recorded at fair value. Held-to-maturity
securities are recorded at amortized cost, adjusted for the amortization or accretion of
discounts or premiums. Unrealized holding gains and losses on trading securities are
included in earnings. Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported as a separate
component of stockholders’ equity until realized. As of December 31, 2007, Zebra’s
investments in marketable debt securities are classified as available-for-sale. In addition,
as of December 31, 2007, all of our investments in marketable debt securities with
maturities greater than one year are classified as long-term investments on the balance
sheet due to our ability to hold them until maturity.
We account for the partnership interests using the cost method until our ownership
percentage in a partnership reaches 5% of the total partnership portfolio value. At that
time, we begin using the equity method to account for that particular partnership. During
2006, we reached the 5% threshold on one of our partnership interests. During 2007, we
liquidated this partnership interest. During the fourth quarter of 2007, we also liquidated
95% of two other partnership interests, with the balances in all remaining partnership
interests to be liquidated in 2008.
Accounts Receivable
We have standardized credit granting and review policies and procedures for all customer
accounts, including:
• Credit reviews of all new customer accounts,
• Ongoing credit evaluations of current customers,
• Credit limits and payment terms based on available credit information,
• Adjustments to credit limits based upon payment history and the customer’s current
credit worthiness, and
• An active collection effort by regional credit functions, reporting directly to the
corporate financial officers.
We reserve for estimated credit losses based upon historical experience and specific
customer collection issues. Over the last three years, accounts and notes receivable reserves
varied from 0.6% to 3.3% of total accounts receivable. Accounts receivable reserves as
of December 31, 2007, were $5,075,000, or 3.3% of the balance due. We feel this reserve
level is appropriate considering the quality of the portfolio as of December 31, 2007. While
credit losses have historically been within expectations and the provisions established,
we cannot guarantee that our credit loss experience will continue to be consistent with
historical experience.
Inventories
We value our inventories at the lower of the actual cost to purchase or manufacture using
the first-in, first-out (FIFO) method, or the current estimated market value. We review
inventory quantities on hand and record a provision for excess and obsolete inventory
based on forecasts of product demand and production requirements for the subsequent
twelve months.
Over the last three years, our inventory reserves have ranged from 9.6% to 14.2% of
gross inventory. As of December 31, 2007, inventory reserves were $8,999,000, or 9.6% of
gross inventory. We feel this reserve level is appropriate considering the quantities and
quality of the inventories as of December 31, 2007.
Valuation of Long-Lived and Intangible Assets and Goodwill
We test the impairment of goodwill each year or whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. We completed our
last assessment during June 2007. At that time, no adjustment to goodwill was necessary
due to impairment.
We evaluate the impairment of identifiable intangibles and other long-lived assets whenever
events or changes in circumstances indicate that the carrying value may not be recoverable.
Factors considered that may trigger an impairment review consist of:
• Significant underperformance relative to expected historical or projected future
operating results,
• Significant changes in the manner of use of the acquired assets or the strategy for
the overall business,
• Significant negative industry or economic trends,
• Significant decline in Zebra’s stock price for a sustained period, and
• Significant decline in market capitalization relative to net book value.
If we believe that one or more of the above indicators of impairment have occurred, we
measure impairment based on projected discounted cash flows using a discount rate that
incorporates the risk inherent in the cash flows. Net intangible assets, long-lived assets
and goodwill amounted to $433,620,000 as of December 31, 2007.
Income Taxes
On January 1, 2007, we adopted Financial Accounting Standards Board (FASB)
Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes - an interpretation
of FASB Statement No. 109. According to FIN No. 48, we identified, evaluated, and
measured the amount of income tax benefits to be recognized for all of our income tax
positions. The net income tax assets recognized under FIN No. 48 did not differ from the
net assets recognized before adoption, and, therefore, we did not record an adjustment
related to the adoption of FIN No. 48. Zebra did not have any unrecognized tax benefits as
of December 31, 2007.
135,000 shares that were repurchased as of December 31, 2006.
• Stock option exercises and purchases under the stock purchase plan contributed
$8,375,000.
Zebra has concluded all U.S. federal income tax audits for years through 2004. The tax
years 2004 through 2007 remain open to examination by multiple state taxing jurisdictions.
Zebra’s continuing practice is to recognize interest and penalties related to income tax
matters as part of income tax expense. For the year ended December 31, 2007, we did not
accrue any interest or penalties into income tax expense.
Contingencies
We record estimated liabilities related to contingencies based on our estimates of
the probable outcomes. Quarterly, we assess the potential liability related to pending
litigation, tax audits and other contingencies and confirm or revise estimates and
reserves as appropriate.
For a discussion of all current litigation matters, see Note 16 in the Notes to the
Consolidated Financial Statements included in the Form 10-K.
Stock-Based Compensation
As of December 31, 2007, Zebra had two stock-based compensation plans available
for future grants. As of January 1, 2006, Zebra adopted SFAS No. 123(R), Share-Based
Payment, utilizing the modified retrospective approach, which requires the prior period
financial statements to be restated to recognize compensation costs in the amounts
previously reporting in the pro forma footnote disclosures. See Notes 2 and 3 to the
Consolidated Financial Statements included in the Form 10-K for further information on
the adoption and impact of SFAS No. 123(R).
Liquidity and Capital Resources
During 2007, Zebra purchased WhereNet Corp. for $127,450,000, proveo AG for
$15,467,000, and Navis, LLC for $143,844,000. As a result, Zebra’s cash and investment
balances decreased to $281,179,000 at December 31, 2007, compared with $559,189,000
at December 31, 2006. Other factors affecting cash and investment balances during 2007
include (note that changes discussed below include the impact of foreign currency):
• Operations provided a net cash increase of $158,120,000 primarily from net income.
• Deferred tax assets increased $5,477,000, primarily due to deferred taxes on
compensation costs.
• Accounts receivable decreased $4,453,000 because of higher sales. Days sales
outstanding increased to 58.9 at the end of 2007 from 53.3 at the end of 2006.
• Accrued expenses increased by $16,804,000 for payroll, bonus, warranty, deferred
revenue and sales tax liabilities.
• Taxes payable decreased $1,337,000 due to the timing of tax payments made in 2007.
• Purchases of property and equipment totaled $22,070,000.
• Intangibles increased $4,800,000 due to payments for licenses to use patents.
• Net sales of investments totaled $278,815,000.
• Purchases of treasury shares totaled $112,094,000. Zebra made open market
repurchases of our shares under an authorization of the Board of Directors dated
October 4, 2005 and August 1, 2007. Cash of $4,704,000 was paid during 2007 for
In February 2008, we announced that printer manufacturing will be transferred to a third-
party manufacturer. This transition is expected to occur over the next 18 to 24 months.
See Note 21 to our Consolidated Financial Statements in this Annual Report on Form 10-K
for further discussion.
Contractual Obligations
Zebra’s contractual obligations as of December 31, 2007 were:
Payments due by period
Less than
1 year
Total
1-3 years
3-5 years
more than
5 years
Operating lease obligations $38,944
$ 9,360
$12,820
$8,473
$8,291
Purchase obligations
51,634
51,634
—
—
—
Total
$90,578
$60,994
$12,820
$8,473
$8,291
Purchase obligations are for purchases made in the normal course of business to meet
operational requirements, primarily raw materials.
Management believes that existing capital resources and funds generated from
operations are sufficient to finance anticipated capital requirements. It is our intention
to actively pursue opportunities to acquire other businesses.
Recently Issued accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
statement defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair value
measurements. This Statement will be effective for Zebra beginning in fiscal 2008, and
we are in the process of determining any potential impact to the financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, which allows entities to voluntarily choose, at specified
election dates, to measure many financial assets and financial liabilities (as well as
certain non-financial instruments) at fair value (the “fair value option”). The election is
made on an instrument-by-instrument basis and is irrevocable. If the fair value option
is elected for an instrument, the Statement specifies that all subsequent changes in fair
value for that instrument shall be reported in earnings. This Statement is effective for
Zebra for the fiscal year ending December 31, 2008. We have not yet determined the
effect this Statement will have on our operations or financial position.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, to create
greater consistency in the accounting and financial reporting of business combinations.
SFAS No. 141(R) establishes principles and requirements for how the acquirer in a
business combination (i) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling interest,
(ii) recognizes and measures the goodwill acquired in the business combination or
a gain from a bargain purchase, and (iii) determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial effects
of the business combination. This statement applies to fiscal years beginning after
December 15, 2008 and will generally affect acquisitions going forward.
Item 7a. Quantitative and Qualitative Disclosures about market Risk
Interest Rate Risk
Zebra is exposed to the impact of changes in interest rates because of our large
investment portfolio. As stated in our written investment policy, the investment portfolio
is viewed as a strategic resource that will be managed to achieve above market rates of
return in exchange for accepting a prudent amount of incremental risk, which includes
the risk of interest rate movements. Risk tolerance is constrained by an overriding
objective to preserve capital across each quarterly reporting cycle.
Zebra mitigates interest rate risk with an investment policy that requires the use
of outside professional investment managers, investment liquidity, and broad
diversification across investment strategies, and which limits the types of investments
that may be made. Moreover, the policy requires due diligence of each investment
manager both before employment and on an ongoing basis.
The following table sets forth the impact of a one-percentage point movement in interest
rates on the value of Zebra’s investment portfolio (in thousands, except per share data).
Interest rate sensitive instruments
+1 percentage point movement
Effect on Pretax Income
Effect on Diluted EPS (after tax)
-1 percentage point movement
Effect on Pretax Income
Effect on Diluted EPS (after tax)
as of December 31,
2006
2007
$ (3,206)
$ (0.03)
$ 3,206
$ 0.03
$ (7,140)
$ (0.07)
$ 7,140
$ 0.07
Because these securities are classified as available-for-sale under SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, the impact of a one-
percentage point movement in interest rates occurs over an extended period of time as
investments are sold and the funds are subsequently reinvested.
Foreign Exchange Risk
We conduct business in approximately 100 countries throughout the world and,
therefore, are exposed to risk based on movements in foreign exchange rates. We
generally invoice customers in their local currency and have a resulting foreign currency
denominated revenue transaction and accounts receivable. We also purchase certain raw
materials and other items in foreign currencies. We manage these risks using derivative
financial instruments. See Note 15 of the Notes to the Consolidated Financial Statements
included in this form 10-K for further discussions of hedging activities.
The following table sets forth the impact of a ten percent movement in the dollar/pound
and dollar/euro rates measured as if Zebra did not engage in the selective hedging
practices described above and in Note 15. It is based on the dollar/euro and dollar/pound
exchange rates and euro and pound denominated assets and liabilities (in thousands,
except per share data).
Foreign exchange
Dollar/pound
Effect on Pretax Income
Effect on Diluted EPS (after tax)
Dollar/euro
Effect on Pretax Income
Effect on Diluted EPS (after tax)
Euro/pound
Effect on Pretax Income
Effect on Diluted EPS (after tax)
as of December 31,
2006
2007
$ 599
$ 0.01
$ 2,195
$ 0.02
$ 3,073
$ 0.03
$ 490
$ 0.00
$ 2,240
$ 0.02
$ 2,775
$ 0.03
Equity Price Risk
Zebra currently employs five investment managers, three of which manage portfolios of
investment funds (i.e., fund of funds). These investment funds use a variety of investment
strategies, some of which involve the use of equity securities. By policy, management
limits the amount of Zebra’s investments in alternative investment strategies to a maximum of
15% of the total investment portfolio, with no single investment exceeding $15,000,000.
Zebra is currently in the process of liquidating all of our partnership interests.
Zebra utilizes a Value-at-Risk (VaR) model to determine the maximum potential one-day loss
in the fair value of its interest rate, foreign exchange and equity price sensitive instruments.
The following table sets forth the impact of a ten percent change in the value of all equity
positions held by Zebra’s investment managers (in thousands, per share data).
Equity price sensitive instruments
+10 percent movement
Effect on Pretax Income
Effect on Diluted EPS (after tax)
-10 percent movement
Effect on Pretax Income
Effect on Diluted EPS (after tax)
as of December 31,
2006
2007
$ 1,170
$ 0.01
$ 4,333
$ 0.04
$ (1,170)
$ (0.01)
$ (4,333)
$ (0.04)
From time to time, Zebra has taken direct equity positions in companies. These
investments relate to potential acquisitions and other strategic business opportunities.
To the extent that it has a direct investment in the equity securities of another company,
Zebra is exposed to the risks associated with such investments.
net assets, respectively, as of December 31, 2007 and $3,129 and $190 of revenues and
net income, respectively, for the year then ended. (All numbers referenced above for
WhereNet, LLC and Navis Holdings, LLC are state in thousands.)
Based on management’s assessment, which excluded an assessment of internal control
over financial reporting of the acquired operations of WhereNet, LLC and Navis Holdings,
LLC, and those criteria, our management believes that, as of December 31, 2007, our internal
control over financial reporting is effective. Our independent registered public accounting
firm, Ernst & Young LLP, has issued an attestation report on Zebra’s internal control over
financial reporting. That report is included on page 41 of this report on Form 10-K.
Changes in Internal Control over Financial Reporting
During 2007, we made changes to our controls and procedures as part of our ongoing
monitoring of our controls. However, none of these changes has materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on the Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal controls will
prevent or detect all errors and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the objectives
of the control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that misstatements due to error or
fraud will not occur or that all control issues and instances of fraud, if any, within Zebra
have been detected.
These inherent limitations include the realities that judgments in decision-making can
be faulty and that breakdowns can occur because of simple error or mistake. Controls
can also be circumvented by the individual acts of some persons, by collusion of
two or more people, or by management override of the controls. The design of any
system of controls is based in part on certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Projections of any evaluation of
controls effectiveness to future periods are subject to risks. Over time, controls may
become inadequate because of changes in conditions or deterioration in the degree of
compliance with policies or procedures.
Item 8. Financial Statements and Supplementary Data
The financial statements and schedule of Zebra are annexed to this report as pages F-2
through F-22. An index to such materials appears on page F-1.
Item 9. Changes in and Disagreements with accountants on
accounting and Financial Disclosures
Not applicable.
Item 9a. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of
the period covered by this Form 10-K. The controls evaluation was conducted under the
supervision of our Disclosure Committee, and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer. Based on that
evaluation, our Chief Executive Office and Chief Financial Officer, have concluded that
our disclosure controls and procedures were effective to provide reasonable assurance
that (i) the information required to be disclosed by us in this Annual Report on Form 10-K
was recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and (ii) information required to be disclosed by us in our
reports that we file or submit under the Exchange Act is accumulated and communicated
to our management, including our principal executive and principal financial officers, or
persons performing similar functions, as appropriate to allow timely decisions regarding
required disclosure.
management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control
over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act to provide reasonable assurance regarding the reliability of our financial reporting
and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. Our management assessed the effectiveness
of our internal control over financial reporting as of December 31, 2007. In making this
assessment, our management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated
Framework. We completed our acquisitions of WhereNet, LLC and Navis Holdings, LLC on
January 25, 2007 and December 14, 2007, respectively. As permitted by the U.S. Securities
and Exchange Commission, management’s assessment as of December 31, 2007 did
not include the internal control of WhereNet LLC and Navis Holdings, LLC, which are
included in our consolidated financial statements as of December 31, 2007. WhereNet, LLC
constituted $139,958 and $118,242 of total and net assets, respectively, as of December
31, 2007 and $27,308 and $(10,856) of revenues and net income (loss), respectively, for
the year then ended. Navis Holdings, LLC constituted $174,542 and $156,887 of total and
Report of Independent Registered Public accounting Firm
On Internal Control over Financial Reporting
The Board of Directors and Stockholders
of Zebra Technologies Corporation:
We have audited Zebra Technologies Corporation and subsidiaries’ internal control over
financial reporting as of December 31, 2007, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Zebra Technologies Corporation’s
management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitation, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control over
Financial Reporting, management’s assessment of and conclusion on the effectiveness of
internal control over financial reporting did not include the internal controls of WhereNet,
LLC and Navis Holdings, LLC, which are included in the 2007 consolidated financial
statements of Zebra Technologies Corporation. WhereNet, LLC constituted $139,958 and
$118,242 of total and net assets, respectively, as of December 31, 2007 and $27,308 and
$(10,856) of revenues and net income (loss), respectively, for the year then ended. Navis
Holdings, LLC constituted $174,542 and $156,887 of total and net assets, respectively,
as of December 31, 2007 and $3,129 and $190 of revenues and net income, respectively,
for the year then ended. Zebra Technologies Corporation completed its acquisitions of
WhereNet, LLC and Navis Holdings, LLC on January 25, 2007 and December 14, 2007,
respectively, and as permitted by the U.S. Securities and Exchange Commission’s
guidance, management did not assess the effectiveness of internal control over financial
reporting of WhereNet, LLC and Navis Holdings, LLC. Our audit of internal control over
financial reporting of Zebra Technologies Corporation also did not include an evaluation
of the internal control over financial reporting of WhereNet, LLC and Navis Holdings, LLC.
In our opinion, Zebra Technologies Corporation and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of December 31,
2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of Zebra
Technologies Corporation and subsidiaries as of December 31, 2007 and 2006, and the
related consolidated statements of earnings, comprehensive income, stockholders’
equity, and cash flows for each of the three years in the period ended December 31, 2007,
and our report dated February 28, 2008 expressed an unqualified opinion thereon.
/s/Ernst & Young LLP
Chicago, Illinois
February 28, 2008
Item 9B. Other Information
PaRT IV
Not applicable.
PaRT III
Item 10. Directors, Executive Officers and Corporate Governance
We have adopted a Code of Ethics that applies to Zebra’s Chief Executive Officer, Chief
Financial Officer and the Vice President and Controller. The Code of Ethics is posted on
the Investor Relations – Corporate Governance page of Zebra’s Internet Web site, www.
zebra.com, and is available for download. Any waiver from the Code of Ethics and any
amendment to the Code of Ethics will be disclosed on such page of Zebra’s Web site.
All other information in response to this item is incorporated by reference from the Proxy
Statement sections entitled “Election of Directors,” “Executive Officers” and “Corporate
Governance.”
Item 11. Executive Compensation
The information in response to this item is incorporated by reference from the Proxy
Statement sections entitled “Executive Compensation and Certain Transactions,”
“Compensation Discussion and Analysis,” “Director Compensation,” “Compensation
Committee Interlocks and Insider Participation” and “Compensation Committee Report.”
Item 12. Security Ownership of Certain Beneficial Owners and
management and Related Stockholder matters
The information in response to this item is incorporated by reference from the Proxy
Statement section entitled “Security Ownership of Management and Certain Beneficial
Owners” and “Equity Compensation Plan Information.”
Item 13. Certain Relationships, Related Transactions and
Director Independence
The information in response to this item is incorporated by reference from the Proxy
Statement section entitled “Certain Relationships and Related Transactions” and
“Corporate Governance.”
Item 14. Principal accounting Fees and Services
The information in response to this item is incorporated by reference from the Proxy
Statement section entitled “Fees of Independent Auditors.”
Item 15. Exhibits and Financial Statement Schedules
The financial statements and schedule filed as part of this report are listed in the
accompanying Index to Financial Statements and Schedule. The exhibits filed as a part
of this report are listed in the accompanying Index to Exhibits.
SIGnaTuRES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 28th day of February 2008.
ZEBRa TECHnOLOGIES CORPORaTIOn
By: /s/Anders Gustafsson
Anders Gustafsson
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, the report has
been signed below by the following persons in the capacities and on the dates indicated.
Signature
Title
/s/Anders Gustafsson
Anders Gustafsson
Chief Executive Officer
(Principal Executive Officer), Director
/s/Gerhard Cless
Gerhard Cless
Executive Vice President,
Director
Date
February 28, 2008
February 28, 2008
/s/Charles R. Whitchurch
Charles R. Whitchurch
Chief Financial Officer and Treasurer
(Principal Financial Officer)
February 28, 2008
/s/Todd R. Naughton
Todd R. Naughton
Vice President and Controller
(Principal Accounting Officer)
/s/Michael A. Smith
Michael A. Smith
Director and Chairman of the
Board of Directors
/s/Christopher G. Knowles
Christopher G. Knowles
Director
/s/Ross W. Manire
Ross W. Manire
/s/Robert J. Potter
Robert J. Potter
/s/Edward L. Kaplan
Edward L. Kaplan
Director
Director
Director
February 28, 2008
February 28, 2008
February 28, 2008
February 28, 2008
February 28, 2008
February 28, 2008
ZEBRa TECHnOLOGIES CORPORaTIOn anD SuBSIDIaRIES
Report of Independent Registered Public accounting Firm
InDEX TO FInanCIaL STaTEmEnTS anD SCHEDuLE
The Board of Directors and Stockholders
of Zebra Technologies Corporation:
Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2007 and 2006
Consolidated Statements of Earnings for the years ended
December 31, 2007, 2006, and 2005
Consolidated Statements of Comprehensive Income
for the years ended December 31, 2007, 2006, and 2005
Consolidated Statements of Stockholders’ Equity
for the years ended December 31, 2007, 2006, and 2005
Consolidated Statements of Cash Flows
for the years ended December 31, 2007, 2006, and 2005
Notes to Consolidated Financial Statements
Page
F-1
F-3
F-3
F-3
F-4
F-5
F-6
Financial Statement Schedule
The following financial statement schedule is included herein:
Schedule II - Valuation and Qualifying Accounts
F-24
We have audited the accompanying consolidated balance sheets of Zebra Technologies
Corporation and subsidiaries (the Company) as of December 31, 2007 and 2006, and
the related consolidated statements of earnings, comprehensive income, stockholders’
equity and cash flows for each of the three years in the period ended December 31,
2007. Our audits also included the financial statement schedule listed in the Index at
Item 15. These financial statements and schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements
and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Zebra Technologies
Corporation and subsidiaries at December 31, 2007 and 2006, and the consolidated
results of their operations and their cash flows for each of the three years in the period
ended December 31, 2007, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
All other financial statement schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or notes thereto.
As discussed in Note 2 to the consolidated financial statements, the Company adopted
the provisions of Statement of Financial Accounting Standards No. 123(R) “Share Based
Payment” effective January 1, 2006 using the modified retrospective transition method.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), Zebra Technologies Corporation’s internal
control over financial reporting as of December 31, 2007, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 28, 2008
expressed an unqualified opinion thereon.
/s/Ernst & Young LLP
Chicago, Illinois
February 28, 2008
ZEBRa TECHnOLOGIES CORPORaTIOn
COnSOLIDaTED BaLanCE SHEETS
(Amounts in thousands)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Investments and marketable securities
Accounts receivable, net of allowances of
$5,075 in 2007 and $3,549 in 2006
Inventories, net
Deferred income taxes
Prepaid expenses and other current assets
Total current assets
Property and equipment at cost, net of
accumulated depreciation and amortization
Long term deferred income taxes
Goodwill
Other intangibles, net
Long term investments and marketable securities
Other assets
$
38,211
2,497
98,438
150,775
85,038
14,772
31,101
420,832
67,686
28,407
246,510
119,424
142,033
9,386
Total assets
$ 1,034,278
December 31,
2007
December 31,
2006
December 31,
2007
December 31,
2006
$ 39,648
1,366
219,930
122,540
81,190
9,464
5,552
479,690
57,431
11,917
70,714
34,025
298,245
11,120
$ 963,142
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Deferred revenue
Income taxes payable
Total current liabilities
Deferred rent
Other long-term liability
Total liabilities
Commitments and contingencies (Note 16)
Stockholders’ equity:
Preferred stock
Class A Common Stock
Additional paid-in capital
Treasury stock
Retained earnings
Accumulated other comprehensive income
Total stockholders’ equity
$
42,351
69,437
9,633
751
122,172
961
8,452
131,585
—
722
141,522
(205,058)
960,512
4,995
902,693
Total liabilities and stockholders’ equity
$1,034,278
See accompanying notes to consolidated financial statements.
$ 28,980
40,880
2,311
2,683
74,854
638
9,969
85,461
—
722
139,083
(119,335)
850,399
6,812
877,681
$ 963,142
ZEBRa TECHnOLOGIES CORPORaTIOn
ZEBRa TECHnOLOGIES CORPORaTIOn
COnSOLIDaTED STaTEmEnTS OF EaRnInGS
(Amounts in thousands, except per share data)
COnSOLIDaTED STaTEmEnTS OF COmPREHEnSIVE InCOmE
(Amounts in thousands)
year Ended December 31,
2007
2006
2005
Net income
$110,113
$70,946
$106,184
Other comprehensive income (loss):
Foreign currency translation adjustment
2.277
7,295
(6,407)
Changes in unrealized gain/(loss)
on hedging transactions,
net of income taxes
(5,205)
(1,188)
2,073
Changes in unrealized holding gains/(loss)
on investments, net of income taxes
1,111
(1,672)
444
Comprehensive income
$108,296
$75,381
$102,294
See accompanying notes to consolidated financial statements.
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Amortization of intangible assets
Litigation settlement
Insurance receivable reserve
Acquired in-process technology
Exit costs
Total operating expenses
Operating income
Other income (expense):
Investment income
Interest expense
Foreign exchange gain (loss)
Other, net
Total other income
Income before income taxes and
cumulative effect of accounting change
Income taxes
Income before cumulative effect
of accounting change
Cumulative effect of accounting change,
net of income taxes of $694 (See Note 2)
year Ended December 31,
2007
2006
2005
$868,279
451,161
417,118
$759,524
401,104
358,420
$702,271
348,851
353,420
121,996
57,600
81,356
11,128
—
—
1,853
—
273,933
143,195
23,966
(44)
523
(255)
24,190
96,788
48,959
62,656
3,653
53,392
12,543
—
—
277,991
80,429
23,182
(252)
(635)
(1,082)
21,213
91,630
47,359
64,050
2,341
—
—
—
2,012
207,392
146,028
13,417
(79)
1,286
(370)
14,254
167,375
57,262
101,642
32,015
160,282
54,098
110,113
69,627
106,184
—
1,319
—
Net income
$ 110,113
$ 70,946
$ 106,184
Basic earnings per share before
cumulative effect of accounting change
Diluted earnings per share before
cumulative effect of accounting change
$ 1.61
$ 0.99
$ 1.49
$ 1.60
$ 0.98
$ 1.47
Basic earnings per share
Diluted earnings per share
$ 1.61
$ 1.60
$ 1.01
$ 1.49
$ 1.00
$ 1.47
Basic weighted average shares outstanding
68,463
70,516
71,364
Diluted weighted average and
equivalent shares outstanding
68,908
70,956
72,000
See accompanying notes to consolidated financial statements.
ZEBRa TECHnOLOGIES CORPORaTIOn
COnSOLIDaTED STaTEmEnTS OF STOCKHOLDERS’ EQuITy
(Dollars in thousands)
Balance at December 31, 2004
Issuance of 332,051 common shares upon exercise of
stock options and purchases under stock purchase plan
Repurchase of 1,866,375 shares of Class A Common Stock
Issuance of 165,642 treasury shares upon exercise of
stock options and purchases under stock purchase plan
Additional tax benefit resulting from exercise of options
Stock-based compensation
Net income
Unrealized holding gain on investments (net of income taxes)
Unrealized holding gain on hedging transactions (net of income taxes)
Foreign currency translation adjustment
Balance at December 31, 2005
Repurchase of 2,080,911 shares of Class A Common Stock
Issuance of 459,816 treasury shares upon exercise of
stock options and purchases under stock purchase plan
Additional tax benefit resulting from exercise of options
Stock-based compensation
Cumulative effect of accounting change
Income before cumulative effect of accounting change
Unrealized holding loss on investments (net of income taxes)
Unrealized holding loss on hedging transactions (net of income taxes)
Foreign currency translation adjustment
Class a
Common
Stock
additional
Paid-in
Capital
Treasury
Stock
accumulated
Other
Retained Comprehensive
Earnings
Income (Loss)
Total
$718
$123,639
$ —
$673,269
$ 6,267
$803,893
4
—
—
—
—
—
—
—
—
7,604
—
(2,263)
2,270
8,183
—
—
—
—
—
(70,421)
6,408
—
—
—
—
—
—
722
—
139,433
—
(64,013)
(72,925)
—
—
—
—
—
—
—
—
(7,201)
1,324
7,540
(2,013)
—
—
—
—
17,603
—
—
—
—
—
—
—
—
—
—
—
—
106,184
—
—
—
779,453
—
—
—
—
1,319
69,627
—
—
—
—
—
—
—
—
—
444
2,073
(6,407)
2,377
—
—
—
—
—
—
(1,672)
(1,188)
7,295
7,608
(70,421)
4,145
2,270
8,183
106,184
444
2,073
(6,407)
857,972
(72,925)
10,402
1,324
7,540
(694)
69,627
(1,672)
(1,188)
7,295
Balance at December 31, 2006
$722
$139,083
$(119,335)
$850,399
$ 6,812
$877,681
Repurchase of 3,038,389 shares of Class A Common Stock
Issuance of 578,608 treasury shares upon exercise of
stock options and purchases under stock purchase plan
Additional tax benefit resulting from exercise of options
Stock-based compensation
Net income
Unrealized holding gain on investments (net of income taxes)
Unrealized holding loss on hedging transactions (net of income taxes)
Foreign currency translation adjustment
—
—
—
—
—
—
—
—
—
(107,390)
—
—
(72,925)
(13,292)
664
15,067
—
—
—
—
21,667
—
—
—
—
—
—
—
—
—
110,113
—
—
—
—
—
—
—
(1,672)
(1,188)
7,295
10,402
1,324
7,540
69,627
(1,672)
(1,188)
7,295
Balance at December 31, 2007
$722
$141,522
$(205,058)
$960,512
$ 4,995
$902,693
See accompanying notes to consolidated financial statements.
ZEBRa TECHnOLOGIES CORPORaTIOn
COnSOLIDaTED STaTEmEnTS OF CaSH FLOWS
(Amounts in thousands)
Cash flows from operating activities:
Cash flows from financing activities:
Net income
$110,713
$70,946
$106,184
Purchase of treasury shares
(112,094)
(68,221)
(70,421)
year Ended December 31,
2007
2006
2005
year Ended December 31,
2007
2006
2005
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization
Share-based compensation
Excess tax benefit from
share-based compensation
Cumulative effect of accounting
change (net of tax)
Acquired in-process technology
Insurance receivable reserve
Deferred income taxes
Changes in assets and liabilities,
net of businesses acquired:
Accounts receivable, net
Inventories
Other assets
Accounts payable
Accrued liabilities
Deferred revenue
Income taxes payable
Other operating activities
Net cash provided by
operating activities
Proceeds from exercise of stock options
and stock purchase plan purchases
8,375
10,402
11,753
1,514
2,258
—
(171)
(56,581)
(1,780)
26,902
15,067
16,087
7,540
13,104
8,183
Excess tax benefit from
share-based compensation
Payments for obligation
under capital lease
921
—
(921)
(1,514)
(2,258)
Net cash used in financing activities
(102,798)
(56,305)
Effect of exchange rate changes on cash
(18)
1,972
—
1,853
—
(5,477)
4,453
(134)
(1,321)
(3,418)
16,804
(325)
(1,337)
(4,139)
(1,319)
—
12,543
(6,737)
(4,292)
(13,430)
(483)
(1,869)
9,486
(927)
2,586
(552)
—
—
—
Net increase (decrease) in cash and
cash equivalents
(1,437)
15,206
6,459
(2,053)
Cash and cash equivalents
at beginning of year
Cash and cash equivalents at end of year
39,648
$38,211
24,442
$39,648
17,983
$24,442
(20,422)
(6,204)
(9,562)
3,792
(3,423)
1,431
(2,900)
3,421
Supplemental disclosures of cash flow information:
Interest paid
Income taxes paid
$ 44
62,130
$ 252
33,070
$ 79
61,453
Supplemental disclosures of non-cash transaction:
Purchase of treasury shares
not paid in 2006
$ —
$ 4,704
$ —
Sale of investments not received in 2007
21,925
—
—
158,120
88,065
89,293
See accompanying notes to consolidated financial statements.
Cash flows from investing activities:
Purchases of property and equipment
(22,070)
(19,197)
(14,286)
Acquisition of businesses,
net of cash acquired
Acquisition of intangible assets
(286,761)
(4,800)
(2,681)
(18,091)
(7,797)
(13,754)
Purchases of investments
(1,025,089)
(1,110,472)
(1,021,813)
Maturities of investments
Sales of investments
Net cash used in
investing activities
915,015
366,964
757,249
374,666
673,466
359,711
(56,741)
(18,526)
(24,473)
ZEBRa TECHnOLOGIES CORPORaTIOn
nOTES TO COnSOLIDaTED FInanCIaL STaTEmEnTS
note 1 Description of Business
Zebra Technologies Corporation and its wholly-owned subsidiaries (Zebra) design,
manufacture, sell and support a broad range of direct thermal and thermal transfer label
printers, radio frequency identification printer/encoders, dye sublimation card printers,
digital photo printers and related accessories and support software. These products
are used principally in automatic identification (auto ID), data collection and personal
identification applications and are distributed world-wide through a network of resellers,
distributors and end users representing a wide cross-section of industrial, service and
government organizations.
In 2007, we acquired WhereNet Corp., proveo AG and Navis Holdings, LLC, which we
refer to as Zebra Enterprise Solutions. In 2008, we will be integrating these businesses
into a single business unit, and intend to report their results separately from our specialty
printing business. Together, these companies give Zebra the ability to deliver more
high-value applications that help our customers identify, track and manage assets,
transactions and people. We consider these solutions natural adjacencies to our core
specialty printing business. The solutions these companies provide are sold on a contract
basis and are typically installed over several quarters. These contracts cover a range of
services, including design, installation and ongoing maintenance services.
note 2 Summary of Significant accounting Policies
Principles of Consolidation. These consolidated financial statements were prepared on a
consolidated basis to include the accounts of Zebra and its wholly-owned subsidiaries.
All significant intercompany accounts, transactions and unrealized profit were
eliminated in consolidation.
Fiscal Calendar. Zebra operates on a 4 week/4 week/5 week fiscal quarter, and each fiscal
quarter ends on a Saturday. The fiscal year always begins on January 1 and ends on
December 31. This results in some fiscal quarters being either greater than or less than 13
weeks depending on the days of the week those dates fall. During the 2007 fiscal year, our
quarter end dates were as follows:
• March 31,
• June 30,
• September 29, and
• December 31.
Use of Estimates. These consolidated financial statements were prepared using estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities as of the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents. Cash consists primarily of deposits with banks. In addition,
Zebra considers highly liquid short-term investments with original maturities of less than
seven days to be cash equivalents.
Restricted Cash. Zebra has two types of restricted cash agreements. In the Netherlands,
we have an agreement with the import authorities to place €1,000,000 in a bank deposit
account, which acts as security for the VAT payable. This deferment agreement allows
Zebra to simply quote our deferment number at import and quickly clear customs without
the need to pay VAT. The bank deposit account cannot be accessed or used without
cancelling the deferment agreement. The second type of restricted cash agreement
primarily collateralizes the issuance of letters of credit.
Investments and Marketable Securities. Investments and marketable securities at
December 31, 2007, consisted of U.S. government securities, state and municipal bonds,
corporate bonds, and partnership interests, which are held indirectly in diversified funds
actively managed by investment professionals. Zebra classifies its debt and marketable
equity securities in one of three categories: trading, available-for-sale or held-to-maturity.
Trading securities are bought and held principally for the purpose of selling them in the
near term. Held-to-maturity securities are those debt securities that Zebra has the ability
and intent to hold until maturity. All securities not included in trading or held-to-maturity
are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value. Held-to-maturity
securities are recorded at amortized cost, adjusted for the amortization or accretion of
discounts or premiums. Unrealized holding gains and losses on trading securities are
included in earnings. Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported as a separate
component of stockholders’ equity until realized.
All investments in marketable debt securities except the partnership interests are
classified as available-for-sale securities. We account for the partnership interests using
the cost method until our ownership percentage reaches 5% of the total partnership
portfolio value. At that time, we begin using the equity method to account for the
partnership. As of December 31, 2007, we are in the process of liquidating all of our
interests in these partnerships. This liquidation is expected to be completed by June
2008. We recorded investment income of $9,246,000 related to gains on the liquidations
of the partnerships during 2007.
Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable consist
primarily of amounts due to us from our normal business activities. Collateral on trade
accounts receivable is generally not required. Zebra maintains an allowance for doubtful
accounts for estimated uncollectible accounts receivable. The allowance is based on
our assessment of known delinquent accounts. Accounts are written off against the
allowance account when they are determined to be no longer collectible.
Inventories. Inventories are stated at the lower of cost or market, and cost is determined
by the first-in, first-out (FIFO) method.
Property and Equipment. Property and equipment is stated at cost. Depreciation and
amortization is computed primarily using the straight-line method over the estimated
useful lives of the various classes of property and equipment, which are 30 years for
buildings and range from 3 to 10 years for other property. Leasehold improvements are
amortized using the straight-line method over the shorter of the lease term or estimated
useful life of the asset.
Income Taxes. On January 1, 2007, we adopted Financial Accounting Standards Board
(FASB) Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109. According to FIN No. 48, we identified,
evaluated, and measured the amount of income tax benefits to be recognized for all of
our income tax positions. The net income tax balances recognized under FIN No. 48
did not differ from the net balances recognized before adoption, and, therefore, we did
not record an adjustment related to the adoption of FIN No. 48. Zebra did not have any
unrecognized tax benefits as of December 31, 2007 or December 31, 2006.
Zebra has concluded all U.S. federal income tax audits for years through 2004. The tax
years 2004 through 2007 remain open to examination by multiple state taxing jurisdictions.
Zebra’s continuing practice is to recognize interest and/or penalties related to income tax
matters as part of income tax expense. For the year ended December 31, 2007, we did not
accrue any interest or penalties into income tax expense.
Revenue Recognition. Revenue includes sales of hardware, supplies, software and
services (including repair services, extended service contracts, and professional
services). Product revenue is recognized once four criteria are met: (1) we have
persuasive evidence that an arrangement exits; (2) delivery has occurred and title
has passed to the customer, which happens at the point of shipment provided that no
significant obligations remain; (3) the price is fixed and determinable; and (4) collectibility
is reasonably assured. We provide for an estimate of product returns based on historical
experience. Revenue related to extended warranty and service contracts is recorded
as deferred income and recognized over the life of the contract. Professional services
revenue is recorded when performed. From time to time, Zebra will enter into sales
transactions that include more than one product type. This bundle of products might
include printers, current or future supplies, and services. When this type of transaction
occurs, we allocate the purchase price to each product type based on the fair value of the
individual products. The revenue for each individual product is then recognized when the
earning process for that product is complete.
Intangible Assets. Goodwill represents the unamortized excess of the cost of acquiring
a business over the fair values of the net assets received at the date of acquisition.
Goodwill is no longer being amortized as required by SFAS No. 142, Goodwill and Other
Intangible Assets.
Zebra records payments to resellers of its product as reductions to revenue unless these
payments meet the requirements for operating expense treatment under EITF 01-09
Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor’s Products). See the market development funds accounting policy for further details.
We test the impairment of goodwill each year or between annual impairment dates
whenever events or changes in circumstances indicate that the carrying value may not be
recoverable. We completed our last annual assessment during June 2007. At that time, no
adjustment to goodwill was necessary due to impairment.
We evaluate the impairment of identifiable intangibles and other long-lived assets whenever
events or changes in circumstances indicate that the carrying value may not be recoverable.
Factors considered that might trigger an impairment review consist of:
• Significant underperformance relative to expected historical or projected future
operating results,
• Significant changes in the manner of use of the acquired assets or the strategy for
the overall business,
• Significant negative industry or economic trends,
• Significant decline in Zebra’s stock price for a sustained period, and
• Significant decline in market capitalization relative to net book value
If we believe that one or more of the above indicators of impairment have occurred,
we compare the carrying value to the undiscounted future cash flows of the asset to
determine if the carrying value is recoverable. If the carrying value is not determined to
be recoverable, we measure impairment based on a projected discounted cash flow using
a discount rate that incorporates the risk inherent in the cash flows.
Other intangible assets consist primarily of customer relationships, current technology
and patents and patent licenses. These assets are recorded at cost and amortized on
a straight-line basis over a weighted-average life of 9 years, which approximates the
estimated useful lives. Accumulated amortization for these other intangible assets was
$24,658,000 and $13,501,000 at December 31, 2007 and 2006, respectively.
Revenue includes all customer billings for shipping and handling charges. The related
costs of shipping and handling revenue are recorded as cost of goods sold.
Our enterprise solutions group has fixed fee software implementation projects, for
which we use the percentage of completion method for revenue recognition. Under this
method of accounting, we recognize revenue based on the ratio of costs incurred to total
estimated costs. Contract terms generally provide for progress billings on advance terms
or based on completion of certain phases of the work. At December 31, 2007, unbilled
revenue was $8,013,000 and receivables for contracts in progress included in accounts
receivable were $10,748,000.
Research and Development Costs. Research and development costs are expensed as
incurred. These costs include:
• Salaries, benefits, and other R&D personnel related costs,
• Consulting and other outside services used in the R&D process,
• Engineering supplies,
• Engineering related information systems costs, and
• Allocation of building and related costs
From time to time, Zebra will provide engineering and development services to third parties
on a contract basis. Zebra does not guarantee the outcome of this research and does not
retain any obligation to repay third party funding received for these contract services.
Since these services are not part of our standard product offering, we treat payments
received under these arrangements as reductions to research and development costs.
Advertising. Advertising costs are expensed as incurred. Advertising expenses for the
years ended December 31, 2007, 2006 and 2005 totaled $6,361,000, $5,857,000 and
$5,524,000, respectively.
year Ended December 31,
2006
2005
Foreign currency option contracts
Market Development Funds. Zebra makes market development funds available to its
resellers to support demand generation activity by the resellers. These funds require the
reseller to provide specific services or benefits to Zebra and substantiate the fair value
of such. Zebra reimburses resellers for agreed activities up to the fair value of the benefit
received by Zebra. These payments are treated as marketing costs consistent with the
requirements of EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor’s Products). Any payments to resellers that do not
meet these requirements are recorded as reductions to revenue.
Warranty. In general, Zebra provides warranty coverage of one year on printers against
defects in material and workmanship. Printheads are warranted for nine months and
batteries are warranted for three months. A provision for warranty expense is recorded at
the time of shipment and adjusted quarterly based on historical warranty experience. The
following table is a summary of Zebra’s accrued warranty obligation.
Warranty Reserve (in thousands)
Balance at the beginning of the period
Warranty expense during the period
2007
$2,250
6,522
Warranty payments made during the period
(5,361)
Balance at the end of the period
$3,411
$1,922
5,792
(5,464)
$2,250
$1,691
6,394
(6,163)
$1,922
During 2005, Zebra began providing for environmental recycling reserves similar to
warranty reserves. In the European Union, we have an obligation in the future to recycle
printers. This reserve is based on all new printers sold after August 13, 2005, and printers
sold prior to that date that are returned to us upon our sale of a new printer to a customer.
The following is a summary of Zebra’s accrued recycling obligation.
Recycling Reserve (in thousands)
Balance at the beginning of the period
Recycling expense during the period
Recycling payments made during the period
Exchange rate impact
2007
$2,115
1,580
—
11
year Ended December 31,
2005
2006
$ 632
1,373
—
110
$ —
632
—
—
Balance at the end of the period
$3,706
$2,115
$ 632
Fair Value of Financial Instruments. Zebra estimates the fair value of its financial
instruments as follows:
Instrument
method for determining fair value
Cash, cash equivalents, accounts
receivable and accounts payable
Cost, which approximates fair value due to
the short-term nature of these instruments
Investments in marketable
debt securities
Partnership interests
Foreign currency forward contracts
Market quotes from independent pricing
services
Cost method, unless Zebra’s ownership
interest is greater than 5% of the total
portfolio value, then equity method
Estimated using market quoted rates for
foreign currency at the balance sheet date
Estimated using market quoted rates for
foreign currency at the balance sheet date
and application of such rates subject to the
option terms
Life insurance policies
Cash surrender value
In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, we recognize derivative instruments and hedging activities as either assets or
liabilities on the balance sheet and measure them at fair value. Gains and losses resulting
from changes in fair value are accounted for depending on the use of the derivative and
whether it is designated and qualifies for hedge accounting. See Note 15 for additional
information on our derivatives and hedging activities.
Stock-based Compensation. At December 31, 2007, we had two stock-based compensation
plans available for future grants, which are described more fully in Note 3. Prior to January 1,
2006, we accounted for these plans using the intrinsic value method in accordance with the
recognition and measurement principles of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by
SFAS No. 123, Accounting for Stock Based Compensation. Accordingly, we recognized no
compensation cost as all options granted under these plans had grant prices equal to the
market value of the underlying common stock on the date of grant.
Effective January 1, 2006, Zebra adopted SFAS No. 123(R), Share-Based Payment,
utilizing the modified retrospective approach, which required the prior period financial
statements to be restated to recognize compensation costs in the amounts previously
reported in the pro forma footnote disclosures. Zebra recognizes compensation costs
using the straight-line method over the vesting period of 1 month to 5 years.
The compensation expense and the related income tax benefit for share-based payments
was included in the Consolidated Statement of Earnings as follows:
insurance contracts on the related employees, of which Zebra is the beneficiary. During
2007, the whole-life insurance policies were liquidated and money market investments
were purchased.
Compensation costs and
related income tax benefit:
Cost of sales
Selling and marketing
Research and development
General and administration
Total compensation expense
Income tax benefit
year Ended December 31,
2006
2007
2005
$ 1,607
2,977
2,316
8,167
15,067
$ 5,198
$ 673
1,720
1,111
4,036
7,540
$2,556
$ 761
1,923
1,359
4,140
8,183
$2,764
On August 31, 2007, Zebra announced the resignation of our Chief Executive Officer
(CEO) and Chairman of the Board in conjunction with our announcement of his successor
as CEO. Zebra entered into an executive transition agreement with the former CEO as
of that date. The agreement specifies that his outstanding unvested options vested on
that date and the option exercise period will continue for the full original maximum
term unaffected by his retirement. As a result, we recorded a modification charge of
approximately $1,702,000 in 2007, representing the difference in fair value of the options
before and after modification.
Prior to adopting SFAS No. 123(R), Zebra presented all tax benefits of deductions
resulting from the exercise of stock grants as operating cash flows in the consolidated
statements of cash flows. SFAS No. 123(R) requires the cash flows resulting from the
tax benefits from tax deductions in excess of the compensation cost recognized (excess
tax benefits) to be classified as financing cash flows. As a result, $921,000 of excess
tax benefits for the year ended December 31, 2007, was classified as financing cash
flows. The excess tax benefits of $1,514,000 for the year ended December 31, 2006 and
$2,258,000 for the year ended December 31, 2005, were classified as financing cash flows.
SFAS No. 123(R) requires entities to estimate the number of forfeitures expected to
occur and record expense based upon the number of awards expected to vest. Prior to
the adoption of SFAS No. 123(R), Zebra accounted for forfeitures as they occurred as
permitted under previous accounting standards. The requirement to estimate forfeitures
is classified as an accounting change, and SFAS No. 123(R) required a one-time
adjustment in the period of adoption. The one-time adjustment (cumulative effect of
accounting change) related to the change in estimating forfeitures increased income by
$1,319,000, net of applicable taxes, for the year ended December 31, 2006.
Deferred Compensation Plan. Zebra has a deferred compensation plan that permits
directors, management and highly compensated employees to defer portions of their
compensation. Zebra immediately pays deferred amounts into a Rabbi Trust, and plan
participants select a method of investing these funds into hypothetical investments.
Zebra tracks the performance of these hypothetical investments in order to determine
the value of each participant’s deferral. Zebra accrues the deferred compensation liability
in other long-term liabilities as the amount that is actually owed to the participants. Our
deferred compensation liability was $3,950,000 as of December 31, 2007, and $6,803,000
as of December 31, 2006. Previously, Zebra purchased corporate-owned whole-life
Foreign Currency Translations. The consolidated balance sheets of Zebra’s foreign
subsidiaries are translated into U.S. dollars using the year-end exchange rate, and statement
of earnings items are translated using the average exchange rate for the year. The resulting
translation gains or losses are recorded in stockholders’ equity as a cumulative translation
adjustment, which is a component of accumulated other comprehensive income.
Acquisition Costs. Zebra periodically has external expenditures related to potential
acquisitions. These expenditures are recorded as prepaid expenses until such time as
Zebra either completes the transaction or abandons the transaction. If the transaction is
completed, the costs are treated as part of the cost of the acquisition. If the transaction is
abandoned, the costs are expensed during the period in which it is abandoned.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of. Zebra
accounts for long-lived assets in accordance with the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. The statement requires
that long-lived assets and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to the sum of the undiscounted cash
flows expected to result from the use and the eventual disposition of the asset. If such
assets are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
Recently Issued Accounting Pronouncements. In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes
a framework for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. This Statement will be effective for
Zebra beginning in fiscal 2008, and we are in the process of determining any potential
impact to the financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, which allows entities to voluntarily choose, at specified
election dates, to measure many financial assets and financial liabilities (as well as
certain non-financial instruments) at fair value (the “fair value option”). The election is
made on an instrument-by-instrument basis and is irrevocable. If the fair value option
is elected for an instrument, the Statement specifies that all subsequent changes in fair
value for that instrument shall be reported in earnings. This Statement is effective for
Zebra for the fiscal year ending December 31, 2008. We have not yet determined the
effect this Statement will have on our operations or financial position.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, to create
greater consistency in the accounting and financial reporting of business combinations.
SFAS No. 141(R) establishes principles and requirements for how the acquirer in a
business combination (i) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling interest,
(ii) recognizes and measures the goodwill acquired in the business combination or
a gain from a bargain purchase, and (iii) determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial effects
of the business combination. This statement applies to fiscal years beginning after
December 15, 2008 and will generally affect acquisitions going forward.
Reclassifications. Certain amounts in the prior years’ financial statements have been
reclassified to conform to the current year’s presentation.
note 3 Stock Based Compensation
As of December 31, 2007, Zebra has two active stock option and stock purchase plans,
which are described below.
On May 9, 2006, the stockholders of Zebra approved the 2006 Zebra Technologies
Corporation Incentive Compensation Plan (the 2006 Plan), which included authorization
for issuance of awards of 5,500,000 shares under the 2006 Plan. The 2006 Plan became
effective immediately and superseded the 1997 Stock Option Plan (the 1997 Plan) and
the 2002 Non-Employee Director Stock Option Plan (the 2002 Director Plan), except that
the prior plans will remain in effect with respect to stock options granted under the prior
plans until such options have been exercised, forfeited, cancelled, expired or otherwise
terminated in accordance with the terms of such grants. The types of awards available
under the 2006 Plan are incentive stock options, nonqualified stock options, stock
appreciation rights, restricted stock, performance shares and units and performance-
based cash bonuses. Employees, directors and consultants of Zebra and its subsidiaries
are eligible to participate in the 2006 Plan. As of December 31, 2007, 4,388,371 shares
were available for grant under the plan, and options for 941,748 shares were outstanding
under the 2006 Plan.
The options granted under the 2006 Plan have an exercise price equal to the closing
market price of Zebra’s stock on the date of grant. The options granted to employees
generally vest over a four or five-year period. These options expire on the earlier of (a)
ten years following the grant date, (b) immediately if the employee is terminated for
cause, (c) ninety days if the employee is terminated involuntarily other than for cause,
(d) thirty days if the employee voluntarily terminates his or her employment, or (e) one
year if the employee’s employment terminates due to death, disability, or retirement. The
Compensation Committee of the Board of Directors administers the plan.
During 2007, the following table shows the number of shares granted and the vesting
schedules of the restricted stock awards that were granted under the Plan to certain
executive officers, and to other managers in conjunction with recent acquisitions.
number of shares granted
Vesting period
41,924
51,826
25,089
One third after each year of service
One half after each year of service
One third after the one year of service; remaining after two
years of service
These restricted stock awards will vest at each vesting date if the executive remains
employed by Zebra throughout the applicable time period, but will vest before the end
of the each vesting period in the event of death, disability, resignation for good reason,
a change in control (as defined in the 2006 Plan), or termination by Zebra other than
for Cause, as defined in the restricted stock agreement entered into by Zebra with each
executive officer who was granted restricted stock (the Restricted Stock Agreement).
The restricted stock is forfeited in certain situations specified in the Restricted Stock
Agreement, including, if before the restricted stock vests, the executive’s employment
is terminated by Zebra for Cause (as defined in the Restricted Stock Agreement) or if the
executive resigns for other than good reason.
The 1997 Plan was superseded by the 2006 Plan. As of December 31, 2007, options
for 1,901,322 shares were outstanding and exercisable under the 1997 Plan. These
options expire on the earlier of (a) ten years following the grant date, (b) immediately
if the employee is terminated for cause, (c) ninety days if the employee is terminated
involuntarily other than for cause, (d) thirty days if the employee voluntarily terminates
his or her employment, or (e) one year if the employee’s employment terminates due to
death, disability, or retirement.
The 2002 Director Plan was superseded by the 2006 Plan. As of December 31, 2007,
options for 186,068 shares were outstanding and exercisable under the 2002 Director
Plan. Unless otherwise provided in an option agreement, options granted under the 2002
Director Plan become exercisable in five equal increments beginning on the date of the
grant and continuing on each of the four anniversaries thereafter. All such options expire
on the earlier of (a) ten years following the grant date, (b) the first anniversary of the
termination date of the non-employee director’s directorship for any reason other than
those listed in clause (c) below, or (c) the termination of the non-employee director’s
directorship by Zebra’s stockholders for cause, or resignation for cause, in each case as
defined in the option agreement.
The Board of Directors and stockholders adopted the 2001 Stock Purchase Plan and
reserved 1,125,000 shares of Class A Common Stock for issuance under the plan. Under
this plan, employees who work a minimum of 20 hours per week may elect to withhold
up to 10% of their cash compensation through regular payroll deductions to purchase
shares of Class A Common Stock from Zebra over a period not to exceed 12 months at
a purchase price per share equal to the lesser of: (1) 85% of the fair market value of the
shares as of the date of the grant, or (2) 85% of the fair market value of the shares as of
the date of purchase. As of December 31, 2007, 547,044 shares have been purchased
under the plan.
For purposes of calculating the compensation cost consistent with SFAS No. 123(R), the
fair value of each stock option granted prior to January 1, 2005, is estimated on the date
of grant using the Black-Scholes option-pricing model. For stock options granted on or
after January 1, 2005, fair value is estimated on the date of grant using a binomial model.
The following table shows the weighted-average assumptions used for stock option
grants as well as the fair value of the options granted based on those assumptions:
Expected dividend yield
Forfeiture rate
Volatility
Risk free interest rate
2007
0%
7.69%
34.73%
4.55%
2006
0%
7.43%
38.30%
4.58%
2005
0%
0%
38.44%
3.74%
– Range of interest rates
4.55% - 5.03% 4.38% - 4.73% 2.36% - 4.50%
Expected weighted-average life
4.88 years
4.58 years
4.83 years
Fair value of options granted
$10,790,000
$5,802,000
$9,701,000
Weighted-average grant date
fair value of options granted
(per share underlying the options)
$13.72
$14.22
$17.16
The forfeiture rate is based on the historical annualized forfeiture rate, which is consistent
with prior year rates. This rate includes only pre-vesting forfeitures. Volatility is based
on an average of the implied volatility in the open market and the annualized volatility of
Zebra’s stock prices over our entire stock history. The risk free interest rate used is the
implied yield currently available from the U.S. Treasury zero-coupon yield curve over
the contractual term of the options. The expected weighted-average life is based on the
exercise price at the midpoint, which combines the average life of the options that have
already been exercised or cancelled with the exercise life of all unexercised options.
The exercise life of unexercised options assumes that the option will be exercised at
the midpoint of the vesting date and the full contractual term. These assumptions are
consistent with the assumptions used in prior years.
In accordance with the WhereNet acquisition agreement, we assumed the existing
unvested stock options exercisable for shares of WhereNet’s common stock and made
them exercisable for Zebra common stock. These new options have vesting dates that
ranged from February 6, 2007 through October 23, 2010. The following table shows the
weighted-average assumptions used for these grants as well as the fair value of these
grants based on those assumptions:
Expected dividend yield
Forfeiture rate
Volatility
Risk free interest rate
Expected weighted-average life
Fair value of options granted
Weighted-average grant date
fair value of options granted
0%
0%
35.23%
4.85%
4.08 years
$4,345,000
$32.77
In accordance with the Navis acquisition agreement, we assumed the existing unvested
stock options exercisable for shares of Navis’ common stock and made them exercisable
for Zebra common stock. These new options have vesting dates that ranged from
February 1, 2008 through April 30, 2011. The following table shows the weighted-average
assumptions used for these grants as well as the fair value of these grants based on
those assumptions:
Expected dividend yield
Forfeiture rate
Volatility
Risk free interest rate
Expected weighted-average life
Fair value of options granted
Weighted-average grant date
fair value of options granted
0%
0%
39.52%
3.58%
4.63 years
$3,294,000
$21.92
On August 31, 2007, Zebra announced the resignation of our Chief Executive Officer
(CEO) and Chairman of the Board in conjunction with our announcement of his successor
as CEO. Zebra entered into an executive transition agreement with the former CEO as
of that date. The agreement specifies that his outstanding unvested options vested on
that date and the option exercise period will continue for the full original maximum
term unaffected by his retirement. As a result, we recorded a modification charge of
approximately $1,702,000 in 2007, representing the difference in fair value of the options
before and after modification.
The fair value of the employees’ purchase rights issued under the Stock Purchase Plan
are estimated with the following weighted-average assumptions used for purchase rights
granted. Expected lives of three months to one year have been used along with these
assumptions.
Fair market value
Option price
Expected dividend yield
Expected volatility
Risk free interest rate
2007
$34.70
$29.50
0%
29%
4.57%
2006
$34.79
$29.57
0%
25%
4.54%
2005
$42.46
$36.09
0%
32%
2.86%
Stock option activity for the years ended December 31, 2007, 2006, and 2005 was as follows:
Fixed Options
Outstanding at beginning of year
Granted
Exercised
Forfeited
Canceled
Outstanding at end of year
Options exercisable at end of year
Intrinsic value of options exercised
2007
Weighted-average
Exercise Price
$34.08
32.10
18.66
40.18
48.71
$34.68
$30.52
Shares
2,460,367
1,069,290
(332,563)
(149,724)
(18,232)
3,029,138
1,413,352
$6,723,000
2006
Weighted-average
Exercise Price
$31.04
43.15
20.85
41.12
46.09
$34.08
$26.49
Shares
2,548,484
408,046
(375,222)
(103,551)
(17,390)
2,460,367
1,035,278
$8,209,000
2005
Weighted-average
Exercise Price
$25.37
48.62
20.26
29.70
34.51
$31.04
$ 23.11
Shares
2,593,982
565,200
(422,586)
(184,087)
(4,025)
2,548,484
877,068
$10,587,000
The following table summarizes information about fixed stock options outstanding at December 31, 2007:
Options Outstanding
Options Exercisable
Range of
Exercise Prices
$1.29-$17.36
$17.36-$25.23
$25.23-$38.26
$38.26-$43.35
$43.35-$53.92
Aggregate intrinsic value
Weighted-average remaining contractual term
number
of Shares
229,067
743,383
508,770
780,597
767,321
3,029,138
Weighted-average
Remaining Contractual Life
Weighted-average
Exercise Price
number
of Shares
Weighted-average
Exercise Price
5.42 years
4.73 years
6.34 years
8.75 years
6.93 years
$ 9.49
22.38
32.64
42.02
48.00
124,228
567,504
227,694
57,436
436,490
1,413,352
$ 7.05
22.15
29.27
42.25
47.19
Options Outstanding
Options Exercisable
$16,297,000
6.6 years
$11,822,000
4.9 years
As of December 31, 2007, there was $21,509,000 of unearned compensation cost related
to stock options granted under the plans. That cost is expected to be recognized over a
weighted-average period of 2.8 years.
The following table (in thousands) summarized the adjusted fair values of the assets
acquired and the liabilities assumed at the date of acquisition:
at December 14, 2007
note 4 Business Combinations
Navis, LLC. On December 14, 2007, Zebra acquired all of the outstanding stock of Navis
Holdings, LLC (Navis) for $143,844,000, which is net of cash acquired and transaction costs.
Headquartered in Oakland, California, Navis provides solutions to optimize the flow of
goods through marine terminals and other operations managing cargo in the supply chain.
The consolidated statements of earnings reflect the results of operations of Navis since the
effective date of the purchase. The pro forma impact of this acquisition was not significant.
Current assets
Property and equipment
Intangible assets
Goodwill
Total assets acquired
Current liabilities
Net assets acquired
$ 26,658
2,807
58,400
74,809
$162,674
(18,830)
$143,844
On a preliminary basis, the purchase price was allocated to identifiable tangible and
intangible assets acquired and liabilities assumed based on their estimated fair values
resulting in goodwill of $74,809,000. The intangible assets of $58,400,000 consist of the
following (in thousands):
Trade names
Customer relationships
Developed technology
The goodwill is not deductible for tax purposes.
amount
useful Life
$2,300
39,000
17,100
2 years
15 years
6 years
WhereNet Corp. On January 25, 2007, Zebra acquired all of the outstanding stock of
WhereNet Corp., for $127,450,000, which is net of cash acquired and transaction costs.
Headquartered in Santa Clara, California, WhereNet provides integrated wireless real
time locating systems (RTLS) to companies primarily in the industrial manufacturing,
transportation and logistics, and aerospace and defense sectors. The consolidated
statements of earnings reflect the results of operations of WhereNet since the effective
date of the purchase. The pro forma impact of this acquisition was not significant.
The following table (in thousands) summarizes the adjusted fair values of the assets
acquired and the liabilities assumed at the date of acquisition.
at January 25, 2007
proveo AG. On July 2, 2007, Zebra acquired all of the outstanding stock of proveo AG
for $15,467,000 (€11,426,000), which is net of cash acquired and transaction costs.
Headquartered in Crailsheim, Germany, proveo AG provides integrated hardware
and software systems that locate and track airport ground support equipment. The
consolidated statements of earnings reflect the results of operations of proveo AG since the
effective date of the purchase. The pro forma impact of this acquisition was not significant.
The following table (in thousands) summarizes the adjusted fair values of the assets
acquired at the date of acquisition.
Current assets
Deferred tax assets, net
Property and equipment
Intangible assets
Goodwill
Total assets acquired
Current liabilities
at July 2, 2007
Net assets acquired
$ 9,254
17,988
360
30,616
88,552
$146,770
(19,320)
$127,450
Current assets
Property and equipment
Intangible assets
Goodwill
Total assets acquired
Deferred tax liability
Current liabilities
Net assets acquired
$ 2,062
114
4,176
11,574
$17,926
(1,572)
(887)
$15,467
On a preliminary basis, the purchase price was allocated to identifiable tangible and
intangible assets acquired and liabilities assumed based on their estimated fair values
resulting in goodwill of $11,574,000. The intangible assets of $4,176,000 consist of the
following (in thousands):
Trade names
Customer relationships
Developed technology – hardware
Developed technology – software
amount
useful Life
$ 130
1,523
1,504
1,019
1.5 years
8 years
8 years
5 years
The transaction calls for potential payments of $5,100,000 in addition to the original
payment. These payments are contingent upon revenue related to specific products for
the first eighteen months after the acquisition.
The goodwill is not deductible for tax purposes.
The purchase price was allocated to identifiable tangible and intangible assets acquired
and liabilities assumed based on their estimated fair values resulting in goodwill of
$88,552,000. The future benefit of the acquired net operating loss of $28,815,000 is
included in the net deferred tax assets. The intangible assets of $30,616,000 consist of the
following (in thousands):
Developed technology
Customer relationships
Backlog
Acquired in-process research and development
amount
$14,978
12,324
1,461
1,853
useful Life
6 years
10 years
1 year
N/A
The acquired in-process research and development of $1,853,000 was written-off at the
date of the acquisition in accordance with FASB Interpretation No. 4, Applicability of
FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method.
Acquired in-process technology is stated separately in the operating expense section of
the consolidated statements of earnings.
The goodwill is not deductible for tax purposes.
As part of the acquisition closing, an escrow balance of approximately $13,600,000 was
established against the total purchase price of $127,450,000. On January 24, 2008, Zebra
filed a claim against the sellers of WhereNet for the entire escrow balance. If Zebra is
successful in recovering some or all of the escrow balance, the amount recovered will be
recorded as an adjustment to goodwill. In addition, during the fourth quarter of 2007, we
recorded a reserve of $5,074,000 for the estimated additional liability as of the acquisition
date. This reserve was treated as an adjustment to purchase price and resulted in an
increase to goodwill.
Swecoin AB. On October 4, 2006, Zebra acquired all of the outstanding stock of Swecoin
AB for $2,681,000. Based in Stockholm, Sweden, with a U.S. office in Rhode Island,
Swecoin AB is a leading supplier of thermal receipt, ticket and document printers for use
in kiosks and other unattended printing applications. The consolidated statements of
earnings reflect the results of operations of Swecoin AB since the effective date of the
purchase. The pro forma effect of this acquisition was not significant.
The following table (in thousands) summarizes the adjusted fair values of the assets
acquired and the liabilities assumed at the date of acquisition.
at October 4, 2006
Current assets
Property and equipment
Intangible assets
Goodwill
Total assets acquired
Current liabilities
Net assets acquired
$ 3,948
235
1,242
1,557
$ 6,982
(4,301)
$ 2,681
The purchase price was allocated to identifiable tangible assets and intangible assets
acquired and liabilities assumed based on their estimated fair values resulting in goodwill
of $1,557,000. The intangible assets of $1,242,000 consist of the following (in thousands):
Developed technology
Backlog
Customer relationships
Trade name
The goodwill is not deductible for tax purposes.
amount
useful Life
$830
42
310
60
5 years
4 months
6 years
2.5 years
note 5 Stockholders’ Equity
Share count and par value data related to stockholders’ equity are as follows:
Preferred Stock
Par value per share
Shares authorized
Shares outstanding
Common Stock—Class A
Par value per share
Shares authorized
Shares issued
Shares outstanding
Treasury stock
Shares held
December 31, December 31,
2006
2007
$0.01
10,000,000
—
$0.01
10,000,000
—
$0.01
150,000,000
72,151,857
66,370,248
$0.01
150,000,000
72,151,857
68,830,029
5,781,609
3,321,828
Stockholder Rights Agreement. Zebra’s Board of Directors adopted a Stockholder Rights
Agreement under which stock purchase rights were paid by dividend to stockholders
of record on March 15, 2002 at the rate of one Class A Right for each outstanding share
of Class A Common Stock. Each Class A Right, other than those held by the acquiring
person, entitles the registered holder to purchase one ten-thousandth of a share of
Series A Junior Participating Preferred Stock, par value $0.01 per share, at a price of
$300 per one ten-thousandth of Class A Preferred Share after the distribution date. The
distribution date is 10 days after the date on which any person or group announces that
it has acquired 15% or more of Zebra’s outstanding common stock or 10 days (or a later
date as determined by the Board of Directors) after the date on which any person or
group announces or commences a tender offer that would result in the person or group
becoming an owner of 15% or more of the outstanding common stock.
The Rights will expire on March 14, 2012 unless that date has been extended by the Board
of Directors or unless the Rights are redeemed or terminated earlier. A committee of
Zebra’s independent directors will review the Rights Plan at least every three years and
decide whether it should continue or be revoked. Zebra generally may amend the Rights
Plan or redeem the Rights at $0.001 per Right at any time prior to the time a person or
group has acquired at least 15% of the outstanding common stock.
note 6 Earnings Per Share
For the years ended December 31, 2007, 2006, and 2005, earnings per share before
cumulative effect of the accounting change were computed as follows (in thousands,
except per-share amounts):
year Ended December 31,
2007
2006
2005
Basic earnings per share:
Income before cumulative effect
of accounting change
Weighted average common
shares outstanding
Per share amount
Diluted earnings per share:
Income before cumulative effect
of accounting change
Weighted average common
shares outstanding
$110,113
$69,627
$106,184
68,463
$1.61
70,516
$0.99
71,364
$1.49
$110,113
$69,627
$106,184
Add: Effect of dilutive securities – stock options
445
Diluted weighted average and equivalent
shares outstanding
Per share amount
68,908
$1.60
68,463
70,516
440
70,956
$0.98
71,364
636
72,000
$1.47
Basic earnings per share:
Net income
Weighted average common
shares outstanding
Per share amount
Diluted earnings per share:
Net income
Weighted average common
shares outstanding
For the years ended December 31, 2007, 2006, and 2005, earnings per share after the
cumulative effect of the accounting change were computed as follows (in thousands,
except per-share amounts):
year Ended December 31,
2007
2006
2005
$110,113
$70,946
$106,184
the cost method until our ownership percentage reaches 5% of the total partnership
portfolio value, because at that point we begin using the equity method to account for
the partnership interest. As of December 31, 2007, we are in the process of liquidating
all of our interests in these partnerships. This liquidation will be complete by June 2008.
As a result of these liquidations, we recorded investment income of $9,246,000 related
to gains on the liquidations of the partnerships during 2007. No other gains or losses on
trading securities were recorded in investment income.
68,463
$1.61
70,516
$1.01
71,364
$1.49
The amortized cost, gross unrealized holding gains, gross unrealized holding losses and
aggregate fair value of investment securities at December 31, 2007, were as follows
(in thousands):
$110,113
$70,946
$106,184
amortized
Gross
unrealized
Cost Holding Gains Holding Losses
Gross
unrealized
Fair
Value
Add: Effect of dilutive securities – stock options
445
Diluted weighted average and equivalent
shares outstanding
Per share amount
68,908
$1.60
68,463
70,516
440
70,956
$1.00
71,364
636
72,000
$1.47
Available-for-sale:
U.S. government
and agency securities
$ 31,989
State and municipal bonds
194,350
Corporate bonds
Other
The potentially dilutive securities that were excluded from the earnings per share
calculation consist of stock options with an exercise price greater than the average
market price of the Class A Common Stock. These options were as follows:
Partnership interests using
cost method*
$
56
899
—
—
$ 955
—
$ 955
$
(505) $ 31,540
(289)
194,960
(20)
—
3,000
38
$
(814) $ 229,538
—
10,933
$
814) $240,471
3,020
38
229,397
10,933
$240,330
Potentially dilutive shares
1,561,918
1,140,689
804,490
year Ended December 31,
2006
2007
2005
note 7 Investments and marketable Securities
We classify our investments in marketable debt securities as available-for-sale in
accordance with the classifications defined in SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. As of December 31, 2007, all of our
investments in marketable debt securities with maturities greater than one year are
classified as long-term in the balance sheet due to our ability to hold them until maturity.
SFAS No. 115 requires that changes in the market value of available-for-sale securities
are reflected in the accumulated other comprehensive income caption of stockholders’
equity in the balance sheet, until we dispose of the securities. Once these securities
are disposed of, either by sale or maturity, the accumulated changes in market value
are transferred to investment income. On the cash flow statements, changes in the
balances of available-for-sale securities are included in purchases, sales and maturities of
investments under investing activities.
Changes in market value of trading securities would be recorded in investment income
as they occur, and the related cash flow statement includes changes in the balances of
trading securities as operating cash flows.
All investments in marketable debt securities except the partnership interests are
classified as available-for-sale securities. We account for the partnership interests using
The amortized cost, gross unrealized holding gains, gross unrealized holding losses
and aggregate fair value of investment securities at December 31, 2006, were as follows
(in thousands):
amortized
Gross
unrealized
Cost Holding Gains Holding Losses
Gross
unrealized
Fair
Value
Available-for-sale:
U.S. government
and agency securities
$ 96,885
State and municipal bonds
373,998
Corporate bonds
Other
8,199
1,017
480,099
$
2
364
—
—
$ 366
$
(730) $ 96,157
(1,193)
373,169
(84)
—
8,115
1,017
$ (2,007) $ 478,458
Partnership interests using
cost method*
Partnership interests using
equity method
28,653
—
—
28,653
10,000
$ 518,752
1,064
$ 1,430
—
11,064
$ (2,007) $ 518,175
*Amounts are at original cost rather than fair value due to the use of the cost method of accounting.
Changes in unrealized gains and losses on available-for-sale securities are included in
these financial statements as follows (in thousands):
year Ended December 31,
2006
2007
2005
Changes in unrealized gains and losses
on available-for-sale securities, net of tax,
recorded in accumulated other
comprehensive income
$1,111
$(1,672)
$444
The following table shows the number, aggregate market value and unrealized losses (in
thousands) of investments with market values that were less than amortized cost as of
December 31, 2007. These lower market values are caused by short-term fluctuations in
interest rates and are not a reflection of the credit worthiness of the issuer. Market values
are expected to recover to the amortized cost prior to maturity.
unrealized Loss < 12 months
number
of investments
aggregate
market Value
Government securities
State and municipal bonds
Corporate bonds
Total
3
5
1
9
$ 7,561
8,406
3,000
$ 18,967
unrealized
Losses
$ (102)
(3)
(20)
$ (125)
unrealized Loss > 12 months
number of
investments
aggregate
market Value
21
27
—
48
$ 13,599
30,986
—
$ 44,585
unrealized
Losses
$ (403)
(286)
—
$ (689)
As of December 31, 2006, the number, aggregate market value and unrealized losses (in thousands) of investments with market values that were less than amortized cost were:
unrealized Loss < 12 months
number
of investments
aggregate
market Value
Government securities
State and municipal bonds
Corporate bonds
Total
1
50
2
53
$ 5,954
101,851
6,034
$113,839
unrealized
Losses
$ (4)
(396)
(61)
$ (461)
unrealized Loss > 12 months
number of
investments
aggregate
market Value
25
84
1
110
$ 24,111
136,752
1,977
$162,840
unrealized
Losses
$ (726)
(797)
(23)
$(1,546)
Zebra is a limited partner in three non-registered partnerships. The partnerships seek to
provide returns to its partners by making strategic investments in a diversified portfolio
of investment funds. Zebra’s investment as a limited partner allows it to have liability
protection limited to the amount of its investments in the funds. During 2007, we began
liquidating all of our interests in these partnerships. This liquidation is expected to
be completed by June 2008. At December 31, 2007, we had requested the liquidation
of $21,925,000 of these funds. The funds had not been received at year end and are,
therefore, included in prepaid expenses and other current assets on the consolidated
balance sheet.
The contractual maturities of debt securities at December 31, 2007, were as follows
(in thousands):
Using the specific identification method, the proceeds and realized gains on the sales of
available-for-sale securities were as follows (in thousands):
Proceeds
Realized gains
Realized losses
Net realized gains/(losses) included
in other comprehensive income
as of the end of the prior year
2007
2006
2005
$343,647
$337,671
$359,711
594
(781)
215
(1,385)
364
(2,060)
(392)
(1,041)
(1,544)
Due within one year
Due after one year through five years
Due after five years through ten years
Due after ten years
Fair Value
$ 87,505
108,228
8,000
25,805
$229,538
note 8 Related-Party Transactions
Prior to August 2007, Zebra leased a building from Unique Building Corporation (Unique),
an entity controlled by certain officers and stockholders of Zebra. On August 1, 2007,
the building was sold to an unrelated party. Lease payments made to Unique under the
lease were recorded as a component of all functional areas and were included in the
consolidated financial statements as follows (in thousands):
2007
2006
2005
unique Operating Lease
$1,358
2,336
2,336
note 9 Inventories
The components of inventories, net of allowances, are as follows (in thousands):
Raw material
Work in process
Finished goods
Total inventories
December 31,
2007
2006
$46,572
2,124
36,342
$85,038
$49,172
1,014
31,004
$81,190
Inventory reserves (included in above numbers)
$ 8,999
$ 9,866
note 10 Property and Equipment
Property and equipment, which includes assets under capital leases, is comprised of the
following (in thousands):
Buildings
Land
Machinery, equipment and tooling
Furniture and office equipment
Computers and software
Automobiles
Leasehold improvements
Projects in progress
Less accumulated depreciation and amortization
Net property and equipment
December 31,
2007
2006
$ 15,336
$ 14,760
1,910
68,571
8,519
56,453
50
10,220
11,729
1,910
59,915
7,669
51,650
14
8,345
6,659
172,788
(105,102)
150,922
(93,491)
$ 67,686
$ 57,431
Other items related to property and equipment are as follows:
Unamortized computer software costs
December 31,
2007
$10,402
2006
$11,755
Amortization of capitalized software
2007
$ 4,447
Total depreciation expense charged to income 15,774
year Ended December 31,
2006
2005
$ 3,600
12,434
$ 2,938
10,763
note 11 Income Taxes
On January 1, 2007, we adopted Financial Accounting Standards Board (FASB)
Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes - an interpretation
of FASB Statement No. 109. According to FIN No. 48, we identified, evaluated, and
measured the amount of income tax benefits to be recognized for all of our income
tax positions. The net income tax balances recognized under FIN No. 48 did not differ
from the net balances recognized before adoption, and, therefore, we did not record an
adjustment related to the adoption of FIN No. 48. Zebra did not have any unrecognized
tax benefits as of December 31, 2007 or December 31, 2006.
Zebra has concluded all U.S. federal income tax audits for years through 2004. The tax
years 2004 through 2007 remain open to examination by multiple state taxing jurisdictions.
Zebra’s continuing practice is to recognize interest and/or penalties related to income tax
matters as part of income tax expense. For the year ended December 31, 2007, we did not
accrue any interest or penalties into income tax expense.
The resulting effective income tax rate for the full year was 34.2% for 2007, compared
with 31.5% for 2006.
The geographical sources of income before income taxes and cumulative effect of
accounting change were as follows (in thousands):
United States
Outside United States
Total
year Ended December 31,
2006
2007
2005
$142,903
$ 86,609
$133,922
24,472
15,033
26,360
$167,375
$101,642
$160,282
Zebra’s intention is to permanently reinvest the undistributed earnings of all of our
foreign subsidiaries in accordance with APB Opinion No. 23, Accounting for Income Taxes
– Special Areas. Accordingly, we have not provided for deferred U.S. income taxes on
undistributed earnings of foreign subsidiaries, which totaled approximately $49,200,000
at December 31, 2007 and $37,400,000 at December 31, 2006. Should such earnings be
remitted to Zebra, foreign tax credits would be available to substantially offset the U.S.
income taxes due upon repatriation.
The provision for income taxes consists of the following (in thousands):
Current:
Federal
State
Foreign
Deferred:
Federal
State
Total
year Ended December 31,
2006
2007
2005
$44,737
$29,376
$ 42,146
5,391
8,399
(1,458)
193
2,804
4,560
(3,748)
(283)
4,706
8,070
(766)
(58)
$57,262
$32,709
$54,098
The provision for income taxes differs from the amount computed by applying the
U.S. statutory Federal income tax rate of 35% to income before income taxes. The
reconciliation of statutory and effective income taxes is presented below (in thousands):
year Ended December 31,
2006
2007
2005
Provision computed at statutory rate
$58,582
$36,279
$56,099
State income tax (net of Federal tax benefit)
Tax-exempt interest income
Acquired in-process technology
Tax benefit of exempt foreign trade income
Domestic manufacturing deduction
Research and experimental credit
Other
3,636
(4,173)
649
—
(1,470)
(400)
438
1,412
(4,378)
—
(1,365)
(665)
(350)
1,776
2,816
(3,301)
—
(1,575)
(735)
(350)
1,144
Provision for income taxes
$57,262
$32,709
$54,098
The amounts in the previous two tables include the tax on the cumulative effect of
accounting principle of $694,000 for 2006.
Deferred income taxes reflect the impact of temporary differences between the amounts
of assets and liabilities for financial reporting purposes and such amounts as measured
by tax laws. Based on management’s assessment, it is more likely than not that the
deferred tax assets will be realized through future taxable earnings.
Tax effects of temporary differences that give rise to deferred tax assets and liabilities are
as follows (in thousands):
December 31,
2007
2006
Deferred tax assets:
Deferred rent-building
Accrued vacation
Deferred compensation
Inventory items
Allowance for doubtful accounts and other receivables
Other accruals
FAS 123(R) stock option expense
Unrealized loss on securities – FAS 115
Recognized tax gain on partnership interests
Unrealized loss on hedges
Net operating carryforward acquired
Total deferred tax assets
Deferred tax liabilities:
Unrealized gain on hedges
Acquisition related items
Depreciation and amortization
Total deferred tax liabilities
Net deferred tax assets
$ 311
1,541
2,879
4,249
4,053
5,255
10,111
—
4,188
3,275
25,093
60,955
(53)
—
(17,723)
(17,776)
$43,179
$ 240
1,369
2,503
4,057
203
5,217
6,675
617
3,863
341
—
29,518
—
(182)
(7,955)
(8,137)
$21,381
Included in the deferred tax assets that resulted from the WhereNet acquisition were
federal and state net operating losses. As of December 31, 2007, we had approximately
$63,100,000 of federal net operating loss carryforwards available to offset future taxable
income which begin to expire in the year 2012. As of December 31, 2007, we also had
approximately $24,500,000 of state net operating loss carryforwards which begin to
expire in the year 2012. Under the United States Tax Reform Act of 1986, the amounts of
and benefits from net operating loss carryforwards may be impaired or limited in certain
circumstances, including significant changes in ownership interests.
note 12 Goodwill and Other Intangible asset Data
Intangible asset data are as follows (in thousands):
December 31, 2007
Gross
Carrying
amount
December 31, 2006
Gross
accumulated
amortization
Carrying accumulated
amount amortization
Amortized intangible assets
Current technology
$ 51,700
$(13,526)
$15,481
$ (9,566)
Patent and patent rights
Customer relationships
31,697
60,685
(6,468)
(4,664)
28,247
3,798
(2,645)
(1,290)
Total
$144,082
$(24,658)
$47,526
$(13,501)
note 14 401(k) Savings and Profit Sharing Plans
Zebra has a Retirement Savings and Investment Plan (the 401(k) Plan), which is intended
to qualify under Section 401(k) of the Internal Revenue Code. Qualified employees may
participate in Zebra’s 401(k) Plan by contributing up to 15% of their gross earnings to
the plan subject to certain Internal Revenue Service restrictions. Zebra matches each
participant’s contribution of up to 6% of gross eligible earnings at the rate of 50%. Zebra
may contribute additional amounts to the 401(k) Plan at the discretion of the Board of
Directors, subject to certain legal limits.
Zebra has a discretionary profit-sharing plan for qualified employees, to which it
contributes a percentage of eligible payroll each year. Participants are not permitted to
make contributions under the profit-sharing plan.
Unamortized intangible assets
Goodwill
$246,510
$70,714
Company contributions to these plans, which were charged to operations, approximated
the following (in thousands):
$ 3,653
401(k)
Profit sharing
Total
year Ended December 31,
2006
2005
$2,030
1,628
$3,658
$1,874
1,775
$3,649
2007
$2,672
1,599
$4,271
Aggregate amortization expense
For the year ended
December 31, 2006
For the year ended
December 31, 2007
$ 11,128
Estimated amortization expense for the years ended:
December 31, 2008
December 31, 2009
December 31, 2010
December 31, 2011
December 31, 2012
Thereafter
17,248
16,868
15,000
14,652
13,758
41,898
During 2007, we acquired intangible assets in the amount of $4,800,000 for customer
relationships, current technology, patents and patent rights. These intangible assets have
an estimated useful life of 7 to 10 years.
During 2007, goodwill increased by $175,796,000 due primarily to the acquisitions of
WhereNet Corp., proveo AG and Navis Holdings, LLC. See Note 4 for further information.
The remaining difference is due to foreign currency translations of the Swecoin and
proveo AG goodwill.
note 13 Other assets
Other assets consist of the following (in thousands):
Money market investments/cash value of life insurance policies
related to the deferred compensation plan (See Note 18)
$2,795
$ 5,888
December 31,
2007
2006
Percentage of eligible payroll contributed
for profit-sharing plan
1.8%
1.8%
2.4%
note 15 Derivative Instruments
In the normal course of business, portions of Zebra’s operations are subject to fluctuations
in currency values. We manage these risks using derivative financial instruments.
Hedging of Net Assets
We use forward contracts and options to manage exposure related to our pound and
euro denominated net assets. We record gains and losses on these contracts and
options in income each quarter along with the transaction gains and losses related to
our net euro asset position. Summary financial information related to these activities
follows (in thousands):
Change in gains and losses from
foreign exchange derivatives
Gain on net foreign currency assets
Net foreign exchange gain
year Ended December 31,
2006
2007
2005
$(3,788)
4,311
$ 523
$ (73)
(562)
$(635)
$ 883
403
$1,286
December 31, December 31, December 31,
2005
2006
2007
Long-term equity securities
Deposits
Other long-term assets
Total
270
1,549
4,772
$9,386
100
507
4,625
$11,120
Notional balance of outstanding contracts:
Pound
Euro
Euro/Pound
£ 3,000
€14,000
€20,500
£ 2,660
€ 17,000
€22,000
£ 3,289
€25,000
€16,000
Net fair value of outstanding contracts
$ (104)
$ (172)
$ 553
Hedging of Anticipated Sales
We manage the exchange rate risk of anticipated euro denominated sales using forward
contracts and option collars. We designate these contracts as cash flow hedges. Gains and
losses on these contracts are deferred in other comprehensive income until the contracts
are settled and the hedged sales are realized, at which time the deferred gains or losses will
be reported as an increase or decrease to sales. Summary financial information related to
the cash flow hedges of future revenues follows (in thousands, except percentages):
Net unrealized losses deferred in
accumulated other comprehensive income:
Gross
Income tax (benefit)
Net
Notional balance of outstanding contracts
Hedge effectiveness
December 31, December 31,
2006
2007
$ (9,252) $ (906)
(3,482) (341)
$ (5,770) $ (565)
€108,500
100%
€44,075
100%
Net gain and (losses) included in revenue
$(3,060)
2007
2006
$(873)
2005
$1,617
year ended December 31,
The above year-to-date gains and losses are the net pretax gains and losses released
from other comprehensive income into earnings during these years. We expect to
release pretax losses in the amount of $9,252,000 from other comprehensive income
into earnings during 2008 along with gains and losses on similar contracts entered into
early in 2008. Currently, the initial duration of our forecasted sales hedge contracts is
twelve months. Effectiveness testing is performed on each contract monthly. We have
not experienced any gains or losses due to ineffectiveness. If we were to experience such
gains or losses, we would record them as a foreign exchange gain or loss. If we were
to cancel or net settle a hedge designated as a cash flow hedge prior to the scheduled
settlement date, we would recognize the gain or loss on that settlement immediately as
a foreign exchange gain or loss.
note 16 Commitments and Contingencies
Leases. Minimum future obligations under non-cancelable operating leases as of
December 31, 2007 are as follows (in thousands):
2008
2009
2010
2011
2012
Thereafter
Total minimum lease payments
Operating Leases
9,360
7,821
4,999
4,568
3,905
8,291
$38,944
Rent expense for operating leases charged to operations was as follows (in thousands):
Rent expense
2007
$10,675
year Ended December 31,
2006
2005
$9,011
$7,822
The operating lease information includes a variety of properties around the world. These
properties are used as manufacturing facilities, distribution centers and sales offices.
Lease terms range from three months to 25 years with breaking periods specified in the
lease agreements.
Letters of credit. In connection with various customer contracts, Zebra has entered into
two letter of credit agreements with a bank. The contingent liability of Zebra under these
agreements as of December 31, 2007 is $652,000.
Legal proceedings. On January 31, 2003, a Writ of Summons was filed in the Nantes
Commercial Court, Nantes, France, by Printherm, a French corporation, and several of
its shareholders (collectively, “Printherm”), against Zebra Technologies France (“ZTF”),
a French corporation and wholly-owned subsidiary of Zebra. Printherm seeks damages
in the amount of €15,304,000 and additional unspecified damages in connection with
ZTF’s termination of negotiations in December 2000 respecting the proposed acquisition
by Zebra of the capital stock of Printherm. The negotiation was terminated based on
unsatisfactory results of the ongoing due diligence. We believe that Printherm’s claims are
without merit and that a loss is not likely to occur. We will vigorously defend the action.
Printherm filed bankruptcy proceedings on August 30, 2004, and the Commercial Court
ordered its liquidation on November 30, 2004. The case was put on hold until the Court
appointed liquidator filed a submission in August 2005, which started the proceedings
again. ZTF filed its answer on November 19, 2005, in anticipation of a Court-ordered
December 19, 2005, hearing date. In response to a request by Printherm’s liquidator, the
Court postponed the hearing date so as to provide time for Printherm to respond to ZTF’s
answer. The hearing has not been scheduled. We have applied to the Court for dismissal
of the case. The Court has not yet ruled on our application for dismissal.
As discussed in Note 4, as part of the closing of the WhereNet acquisition, an escrow
balance of approximately $13,600,000 was established against the total purchase price of
$127,450,000. On January 24, 2008, Zebra filed a claim against the sellers of WhereNet for
the entire escrow balance. If Zebra is successful in recovering some or all of the escrow
balance, the amount recovered will be recorded as an adjustment to goodwill. In addition,
during the fourth quarter of 2007, we recorded a reserve of $5,074,000 for the estimated
additional liability as of the acquisition date. This reserve was treated as an adjustment to
purchase price and resulted in an increase to goodwill.
note 17 Segment Data and Export Sales
Zebra is organized with three internal business units, bar code printers, card printers and
enterprise solutions. The bar code and card printer business units have similar economic
characteristics, products and services, production processes, types of customers,
distribution methods, and regulatory environments. Additionally, there are significant
shared services supporting these two business units. During 2007, the enterprise
solutions business unit has not been separately disclosed due to materiality. Accordingly,
we have aggregated our internal business units and have treated them as one reportable
segment as permitted by SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information.
Information regarding Zebra’s operations by geographic area is contained in the
following table. These amounts (in thousands) are reported in the geographic area of the
destination of the final sale. We manage our business based on these regions rather than
by individual countries.
north Europe, middle
East & africa
america
Latin
america
asia
Total
2007
Net sales
Long-lived assets
2006
Net sales
Long-lived assets
2005
Net sales
Long-lived assets
$416,093
58,646
$ 320,225
7,699
$60,090
401
$71,871
940
$868,279
67,686
$379,820
50,077
$ 264,71
6,637
$53,619
22
$61,374
695
$759,524
57,431
$362,054
43,448
$233,306
5,917
$46,878
7
$60,033
271
$702,271
49,643
Net sales by major product category are as follows (in thousands):
Hardware
Supplies
Service Shipping Cash Flow
Hedging
Software Handling activities
and
and
Total
2007
2006
2005
$660,034
$161,678
$42,801
$6,826
$(3,060)
$868,279
578,002
540,679
150,709
129,183
25,664
25,217
6,022
5,575
(873)
1,617
759,524
702,271
note 18 Deferred Compensation Plan
Zebra offers a deferred compensation plan that permits directors and executive
management employees to defer portions of their compensation and to select a method
of investing these funds. The salaries that have been deferred since the plan’s inception
have been accrued and the only expense, other than salaries, related to this plan is the
gain or loss from the changes to the deferred compensation liability, which is charged to
compensation expense. To fund this plan, Zebra purchases money market investments.
Previously, Zebra purchased corporate-owned whole-life insurance contracts on the
related employees, of which Zebra is the beneficiary. During 2007, the whole-life insurance
policies were liquidated and money market investments were purchased. The following
table shows the income, asset and liability amounts related to this plan (in thousands):
Gain on cash surrender value of life insurance
policies/money market interest included in
investment income
year Ended December 31,
2006
2007
2005
$516
$584
$263
December 31, December 31,
2006
2007
Deferred compensation liability included
in other long-term liability
Money market investments/cash surrender value
included in other assets
$3,950
$6,803
2,795
5,888
note 19 Other Comprehensive Income (Loss)
Stockholders’ equity contains certain items classified as other comprehensive income,
including:
• Foreign currency translation adjustments related to our non-U.S. subsidiary
companies that have designated a functional currency other than the dollar. We
are required to translate the subsidiary functional currency financial statements to
dollars using a combination of historical, month-end, and average foreign exchange
rates. This combination of rates creates the foreign currency translation adjustments
component of other comprehensive income.
• Unrealized holding gains (losses) on foreign currency hedging activities relate to
derivative instruments used to hedge the currency exchange rates for forecasted
euro sales. These hedges are designated as cash flow hedges, and we have deferred
income statement recognition of gains and losses until the hedged transaction
occurs. See Note 15 for more details.
• Unrealized gains (losses) on investments classified as available-for-sale are
deferred from income statement recognition. See Note 7 for more details.
year Ended December 31,
2006
17.1
2007
16.5
2005
15.6
The components of other comprehensive income included in the Consolidated
Statements of Comprehensive Income are as follows (in thousands):
Foreign currency translation adjustments
$ 2,277
$ 7,295
$(6,407)
year Ended December 31,
2006
2007
2005
note 20 major Customers
ScanSource, Inc. is our most significant customer. Our net sales to ScanSource, Inc., an
international distributor of Zebra products related to automatic identification, telephony
and security, as a percentage of total net sales, were as follows:
Changes in unrealized gains and (losses) on
hedging transactions:
ScanSource
Gross
Income tax (benefit)
Net
$(8,346)
(3,141)
$ (5,205)
$(1,905)
(717)
$(1,188)
$ 3,230
1,157
$ 2,073
Changes in unrealized holding gains and
(losses) on investments classified
as available-for-sale:
Gross
$ 1,782
$(2,682)
$ 726
Income tax (benefit)
671
(1,010)
282
Net
$ 1,111
$(1,672)
$ 444
The components of accumulated other comprehensive income (loss) included in the
Consolidated Balance Sheets are as follows (in thousands):
Foreign currency translation adjustments
Unrealized gains and (losses) on foreign currency
hedging activities:
Gross
Income tax (benefit)
Net
Unrealized gains and (losses) on investments
classified as available-for-sale:
Gross
Income tax (benefit)
Net
as of December 31,
2007
$ 10,677
2006
$ 8,400
$ (9,252)
(3,482)
$ (5,770)
$ (906)
(341)
$ (565)
$
141)
53
88
$
$ (1,641)
(618)
$ (1,023)
No other customer accounted for 10% or more of total net sales during these years.
note 21 Subsequent Event
On February 6, 2008, Zebra announced plans to establish regional distribution and
configuration centers, consolidate our supplier base, and transfer final assembly of
thermal printers to Jabil Circuit, a global third-party electronics manufacturer. These
actions are intended to optimize our global printer product supply chain by improving
responsiveness to customer needs and increasing Zebra’s flexibility to meet emerging
business opportunities.
The transfer of final printer assembly operations from Zebra’s plants in California and
Illinois to Jabil’s facility in HuangPu, China, will occur during the next 18 to 24 months.
During this period, we estimate that 650 production-related positions will be eliminated.
We will continue to maintain operations in California and Illinois, including engineering
design centers, product management, sales, marketing and administration.
This supply chain optimization plan will result in estimated total costs and charges of
$24-$26 million for severance, professional services and other associated non-recurring
costs. Of these charges, Zebra expects to incur approximately $18 million in 2008, with
the remaining amount occurring in 2009. The recovery of these costs and expected
financial benefits are expected to begin to accrue in 2009.
note 22 Quarterly Results of Operations (unaudited)
(Amounts in thousands, except per share data)
2007
Net sales
Cost of sales
Gross profit
First
Quarter
$ 208,576
108,786
99,790
Selling and marketing
Research and engineering
General and administrative
Amortization of intangibles
Acquired in-process technology
28,164
14,185
17,933
2,323
1,853
Investment income
Interest expense
Foreign exchange gain (loss)
Other, net
Total other income
Income before taxes
Income taxes
Net income
5,304
(10)
175
86
5,555
Total operating expenses
64,458
65,433
Operating income
35,332
33,969
Second
Quarter
Third
Quarter
$ 208,912
$ 217,218
109,510
112,590
99,402
104,628
29,069
29,080
13,869
13,904
19,875
2,620
—
5,724
(10)
(182)
(366)
21,694
2,928
—
67,606
37,022
4,393
(73)
(23)
(157)
Fourth
Quarter
$ 233,573
120,275
113,298
35,683
15,642
21,854
3,257
—
76,436
36,862
8,545
49
553
182
5,166
4,140
9,329
40,887
14,171
39,135
13,502
41,162
14,201
46,191
15,388
$ 26,716
$ 25,633
$ 26,961
$ 30,803
Basic earnings per share
Diluted earnings per share
$
$
0.39
0.39
$
$
0.37
0.37
$
$
0.39
0.39
$
$
0.46
0.45
2006
Net sales
Cost of sales
Gross profit
First
Quarter
Second
Quarter
Third
Quarter
$ 175,814
$ 187,421
$ 186,386
93,116
97,895
98,600
82,698
89,526
87,786
Selling and marketing
Research and engineering
22,109
12,035
General and administrative
14,649
Amortization of intangibles
Litigation settlement
Insurance receivable write-off
747
—
—
23,510
12,382
15,081
723
—
—
23,467
11,774
14,642
789
53,392
—
Total operating expenses
49,540
51,696
104,064
Fourth
Quarter
$ 209,903
111,493
98,410
27,702
12,768
18,284
1,394
—
12,543
72,691
Operating income (loss)
33,158
37,830
(16,278)
25,719
Investment income
Interest expense
Foreign exchange gain (loss)
Other, net
Total other income
5,207
(218)
110
(448)
4,651
4,987
(13)
(380)
(177)
4,417
6,008
(5)
457
(287)
6,173
6,980
(16)
(822)
(170)
5,972
Income (loss) before taxes
and cumulative effect
of accounting change
Income taxes
Income (loss) before
cumulative effect
of accounting change
Cumulative effect of
accounting change
(net of tax of $694)
37,809
13,037
42,247
14,575
(10,105)
(5,842)
31,691
10,245
24,772
27,672
(4,263)
21,446
1,319
—
—
—
Net income (loss)
$ 26,091
$ 27,672
$
(4,263)
$ 21,446
Basic earnings (loss) per
share before cumulative
effect of accounting change
$
0.35
$
0.39
$
(0.06)
$
0.31
Diluted earnings (loss) per
share before cumulative
effect of accounting change
$
Basic earnings (loss) per share $
0.35
0.37
Diluted earnings (loss)
per share
$
0.37
$
$
$
0.39
0.39
$
$
(0.06)
(0.06)
0.39
$
(0.06)
$
$
$
0.30
0.31
0.30
ZEBRa TECHnOLOGIES CORPORaTIOn
Schedule II
Valuation and Qualifying accounts
(Amounts in thousands)
Description
Balance at Charged to
Beginning Costs and Deductions/
(Recoveries)
Expenses
of Period
Balance at
End of
Period
Valuation account for accounts receivable:
Year ended December 31, 2007
Year ended December 31, 2006
Year ended December 31, 2005
Valuation accounts for inventories:
Year ended December 31, 2007
Year ended December 31, 2006
Year ended December 31, 2005
$ 3,549
1,116
1,561
$ 9,866
7,598
8,037
$ 330
2,856
(396)
$ 8,800
8,951
4,064
$ (1,196)
$ 5,075
423
49
3,549
1,116
$ 9,667
$ 8,999
6,683
4,503
9,866
7,598
See accompanying report of independent registered public accounting firm.
Board of Directors
Officers
Stockholder Information
Michael A. Smith, Chairman (1, 3, 4)
Chairman and Chief Executive Officer
FireVision, LLC
Anders Gustafsson
Chief Executive Officer
Zebra Technologies Corporation
Edward L. Kaplan
Retired Chairman and Chief Executive Officer
Zebra Technologies Corporation
Gerhard Cless
Executive Vice President
Zebra Technologies Corporation
Christopher G. Knowles (1, 2, 3, 4)
Retired Chief Executive Officer
Insurance Auto Auctions, Inc.
Ross W. Manire (1, 4)
Chairman and Chief Executive Officer
ExteNet Systems, Inc.
Dr. Robert J. Potter (2, 4)
President and Chief Executive Officer
R.J. Potter Company
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Nominating Committee
(4) Member of Search Committee
Anders Gustafsson
Chief Executive Officer
Gerhard Cless
Executive Vice President
Veraje Anjargolian
Vice President, General Manager
Card Printer Solutions
John M. Dillon
Senior Vice President, General Manager
Zebra Enterprise Solutions Group
Corporate Headquarters
Zebra Technologies Corporation
333 Corporate Woods Parkway
Vernon Hills, Illinois 60061-3109 U. S. A.
Phone: +1 847 634 6700
Fax +1 847 913 8766
Annual Meeting
Zebra’s Annual Meeting of Stockholders
will be held on May 22, 2008, at 10:30 A. M.
(Central Time), at the Hilton Northbrook,
2855 North Milwaukee Avenue,
Northbrook, Illinois.
Noel Elfant
Vice President, General Counsel and
Corporate Secretary
Investor Relations
Please contact Zebra’s Corporate Headquar-
ters for corporate or product information.
Hugh K. Gagnier
Senior Vice President,
Business Development and Operations
Specialty Printer Group
Philip Gerskovich
Senior Vice President, Corporate Development
Form 10-K
You may receive a free copy of the Zebra
Technologies Corporation Form 10-K Report
filed with the Securities and Exchange Com-
mission by contacting the Investor Relations
Department at the Corporate Headquarters.
Todd R. Naughton
Vice President, Finance
Joanne Townsend
Vice President, Human Resources
Michael H. Terzich
Senior Vice President,
Global Sales and Marketing
Specialty Printer Group
Charles R. Whitchurch
Chief Financial Officer and Treasurer
Independent Auditors
Ernst & Young LLP
Chicago, Illinois
Transfer Agent and Registrar
BNY Mellon Shareowner Services
P.O. Box 358015
Pittsburgh, PA 15252-8015
Overnight Delivery
480 Washington Boulevard
Jersey City, NJ 07310-1900
Zebra Toll Free: 877 870-2368
TDD for hearing impaired: 800 231-5469
Foreign Shareowners: 201 680-6578
TDD for Foreign Shareowners 201 680-6610
Web Site address
Shareowner accounts:
www.bnymellon.com/shareowner/isd
General transfer agent:
www.bnymellon.com/shareowner
E-mail contact: shrrelations@bnymellon.com
G L O B A L / A M E R I C A S H E A D Q U A R T E R S
E U R O P E , M I D D L E E A S T A N D A F R I C A H E A D Q U A R T E R S
A S I A P A C I F I C H E A D Q U A R T E R S
Zebra Technologies Corporation
333 Corporate Woods Parkway
Vernon Hills, IL 60061-3109
USA
Zebra Technologies Europe, Limited
Zebra House, Unit 14, The Valley Centre
Gordon Road, High Wycombe
Buckinghamshire HP13 6EQ, UK
Zebra Technologies Asia Pacific, L.L.C.
120 Robinson Road
#06-01 Parakou Building
Singapore 68913
+1 847 634 6700
www.zebra.com
+ 44 (0) 494 472872
+ 65 6858 0722